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Global round-up

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Caribbean
As many attack so-called “tax havens”, Natalie Shaw speaks to Shawna Lake, whose firm SKIPA promote development in St Kitts & Nevis

France
Companies have been going wrong and being bailed out globally. Liam Vaughan suggests that France is offering less protection for creditors than, say, the UK or the US. Vaughan goes on to say that investors in ailing corporations have taken substantial write-downs in the restructuring process.

Chile
There are not many success stories to come out of the global financial crisis but Chile can feasibly hold its head high as being the only investment-grade country to be upgraded by Moody’s in recent times. The country’s success is through a selection of rigorous laws and disciplines to ensure financial stability.

Brazil
As with Chile, Brazil has been recognised as one of the few countries who have come out of the financial crisis relatively well. BRIC has been benefitting from the positive performance of the country and the outstanding perception of the financial facet that is Sao Paolo.

Bahrain
It has long been assumed that Dubai is the precious stone in the crown of the Middle East, but Bahrain has been quietly sparkling with its strong financial regulations, economic and political stability, strategic location and strong legal framework for a while. These days, the country is gaining more recognition as investors flock to it and reap the benefits.

India
Raian Karanjawala started his own law firm, Karanjawala and Co in 1983 and has been gaining recognition ever since. These days he represents some of the most prestigious clients in some of India’s top cases. Karanjawala argues that his in-depth knowledge of the Indian law system has helped his company gain the praise they deserve.

Greece
KLC Law Firm speak about collective dismissal and employee benefits in Greece. The law firm tells World Finance of the protection Greece offers its workers in the case of dismissal. Employees are guarded from ‘opportunistic’ dismissals but, as KLC say, even fair dismissals have become a costly factor to employers.

All roads lead to a universal currency

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China is worried about the long-term decline of the dollar, mainly because it holds somewhere north of $1,000bn in US government debt. As a Chinese economist notes in a masterly piece of understatement, “a trillion (in greenbacks) is a hot potato.” Several other Asian countries holding vast dollar amounts are worried for the very same reason, and are starting to shift in their seats.

Then there’s Russia, which wants oil and other commodities quoted in another currency, if only because the rouble is in a hole. Finally, many commentators are beginning to think that this might be the right time to tame the forex jungle once and for all. If anything, it may hold in place the possibility of political appeasement.
As Financial Times columnist Martin Wolf suggests, perhaps it might be worth research, or indeed to “have a stab at a world currency.” History tells us this just might be possible. The great gold coins of yesteryear, especially Roman-minted ones, served as international currencies across much of the known world at the time.
 
They also had tremendous staying power – some of the coins were bona fide tender for centuries. For over 600 years, it was possible for a traveller to journey across vast swathes of Eastern Europe and well into Araby, paying his way with the denarius. And as gold historian Jill Leyland points out, as little as five coins were able to “span two millennia from the first century BC to almost the present day”.

A little over 2,200 years ago, the known world got its first international currency in the form of the Roman denarius. A handsome silver coin, it provided “the financial backbone for Rome’s climb to power,” says authority Richard G. Doty.

About 100 years later, in the 1st century BC, Rome issued the gold aureus, mainly for paying taxes. Worth 25 denarii at first, the coin had such enduring commercial integrity – it was 99 percent pure gold – that it was valued at 4,350 denarii by the fourth century AD. Between them, the aureus and denarius bought goods and services across the entire Roman empire for nearly 600 years.

Around 300AD the bigger solidus – or nomisma in the Greek-speaking world where it was also legal tender – replaced the aureus as Rome’s premier gold coin. Strictly speaking, the solidus wasn’t supposed to circulate outside the Byzantine empire but its reputation was so, well, solid that it jumped imperial boundaries and became the money of choice in bazaars and markets even in Arabic countries.

From the seventh century, Arab kingdoms copied the solidus, simply changing its name to the dinar (or bezant). Well into the tenth century, deals were still being done in the dinar.

After a period of wilderness for international currencies, the next cross-border coin was the Venetian ducat. First introduced in quantity in 1284, it gradually became standard currency throughout Europe, especially from the 16th century. Indeed it was still possible to buy and sell with ducats right up to the first world war.

The last great international coin, the sovereign first saw the light of day in 1489 and British governments were still using them in the 1950s in foreign climes, notably the Middle East where it was much-prized. Next? It could be today’s equivalent of economist John Maynard Keynes’ Unitas, the name he suggested in the thirties for a neutral international currency.

Debtholders make tracks for a fairer deal

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Restructuring struggling businesses in France has been slower, less efficient and less creditor-friendly than restructuring businesses in the UK. Banks and funds that hold debt in French companies are subject to less protection when those companies go wrong than lenders to UK companies but, as the number of restructurings shoots up during the downturn, disgruntled debtholders are fighting back.

Thomas Gaucher, director in the European restructuring and debt advisory group at Close Brothers based in Paris, said: “The business of restructuring is newer in France and there are fundamental differences in culture and legislation. Here, the company and its employees – rather than the creditors – are most important, which is very different from the UK model. It has traditionally been less favourable for banks than in other jurisdictions, although things are starting to change.”

In some cases, creditors have been forced to take substantial writedowns on their debt to ensure the survival of the company. Hit by the slump in sales in the global car industry, private equity-owned Autodistribution was struggling to service its €600 million debt pile.

The outcome of a long restructuring battle was that lenders, led by Citigroup, took a big writedown on their debt and ended up with just 21.5 percent of the equity in the surviving business. Private equity firm TowerBrook, after agreeing to invest €88 million in the company as a going concern, ended up with 62.5 percent. The backers of Eurotunnel, the Channel Tunnel operator, also lost billions when a 2007 restructuring resulted in the beleaguered company’s debt being reduced from £6.2 billion to £2.8 billion. One problem for lenders lies in the procédure de sauvegarde pre-insolvency process introduced in 2006 and touted as an equivalent to Chapter 11 in the US.

Under sauvegarde, a company facing impending financial difficulties can apply to the French courts for protection, effectively freezing the right of creditors to enforce the terms of loans that could, in the UK for example, force a liquidation of the company or lead to the creditors taking ownership.

Rod Cork, a restructuring partner at law firm Allen & Overy in Paris, said: “The courts in France will do everything they can to protect debtor companies and their shareholders, but much less to protect the rights of the creditors. The introduction of sauvegarde has exacerbated the difficulties faced by banks and funds which are lenders to companies involved in a restructuring process. It is a very difficult environment for banks and, as the number of leveraged buyout companies facing difficulties increases, that will get worse.”

Another high-profile case, that of building materials group Monier, gives some cause for optimism to lenders. Following a battle between private equity owner PAI and a group of lenders led by Apollo Management, TowerBrook and York Capital, it was the lenders that eventually won control of the business after securing agreement for a substantial debt-for-equity swap. Banks will hope the Monier case represents a precedent and that the balance of power is starting to shift away from equity holders in favour of lenders.

Commission-sharing provides halfway house

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While the UK’s FSA’s rules on unbundling may not have radically reformed the trading landscape, they have subtly altered the terrain. Commission-sharing agreements have become the status quo and the remaining bulge-bracket sellside firms continue to capture the lion’s share of both execution and research business.
A split between the two activities as envisioned in the original Myners report is unlikely to happen in the current environment as fund managers do not want to dig any deeper into their own pockets. Reinder van Dijk, managing consultant at Oxera, which was commissioned by the FSA to compile a progress report on unbundling, said: “Progress has been made but it definitely has not resulted in the second big bang which many people thought would be the case when the FSA first introduced unbundling.

The use of commission-sharing agreements has risen and there is clearly a greater separation between the purchase of trade execution services and research.

“On the other hand, one interesting statistic we found in our study was that the bigger brokers are still the main providers of both research and execution. Investment managers were asked what proportion of their 10 largest research providers were also their top 10 executing brokers. The mean proportion between the two was 75 percent.”

Oxera canvassed 21 large investment managers, 11 brokers, eight retail fund providers and six pension fund trustees last August and September. Published in April, the study showed that the amount investment managers spent on bundled equity research and trading commission packages had fallen to 36 percent at the end of 2007 from 48 percent in 2006. At the same time, there was a jump in the number of commission-sharing agreements, which are designed to allow firms to choose a broker for execution and direct the research portion of the commission to another broker or independent research provider. In terms of the split between the two, commissions had remained relatively stable since unbundling: 45 percent for execution and 55 percent for research.

The popularity of commission-sharing agreements in the UK reflects the global trend, although the country has the highest penetration of such arrangements in Europe, with around 64 percent of firms using them, according to a Tabb Group report published last year. Regulators put unbundling firmly on the map in the wake of the dotcom crash amid anger over biased research that led to overinflated technology shares.

In the UK, this led to a report by Paul Myners in 2001. Five years later, the FSA launched rules on the use of dealing commissions. The aims included increasing transparency and breaking down costs to the end users as well as encouraging the use of payment mechanisms to enable services from brokers to be purchased separately.

While the industry has applauded the FSA’s efforts and the progress being made on unbundling, views are mixed as to whether commission-sharing agreements – the industry’s response – are the best solution.
One main concern is counterparty risk, especially after the demise of Lehman Brothers and Bear Stearns. There is also apprehension about leaving large CSA balances at investment banks, as there is a perception that some can drag their feet when making payments to research providers. For example, banks that remit payments only a few times a year may be carrying sizeable CSA balances that are neither segregated nor insured.

The Lehman collapse revealed that the fate of these assets is uncertain in the case of a bankruptcy. Some fund management groups, such as Scottish Widows Investment Partnership, are happy with the current state of affairs. Tony Whalley, investment director at Swip, said: “We were one of the first institutions to draw up commission-sharing agreements and it has enabled us to fully unbundle.

“We receive research from the firms we want to and not what our counterparties think we should receive. Before we unbundled, about 70 percent of our research commissions went to the large brokers and that number is now more like 60 percent, with the remainder used to pay for more niche operators who often do not offer the execution capabilities that we require.

“One of the most important points about using commission-sharing agreements is to make sure you are continually monitoring the situation to ensure that commissions and payments are broadly in line.”

Many on the sellside note that commission-sharing agreements have forced them to take a harder look at their product offering. Chris Newson, who has sat on both sides of the fence having worked at Fidelity and now as director of global commission management at Bank of America Merrill Lynch, said: “The bulge brackets have concentrated on providing an integrated service and it is not a surprise that there is a reasonable degree of correlation between those firms providing both high-quality research and execution.

The cost of boldly going…
“The benefit of commission-sharing agreements, together with broker voting, is that they make the process more transparent. They enable the buyside to compare and contrast the research providers and brokers, while allowing the brokers to address client coverage requirements and improve their services to better meet their clients’ needs.”

Steve Kelly, global head of Thomson Reuters Extel Surveys, also believes that “commission-sharing agreements have played a role in the growth of boutiques and independent houses. They have made it much more straightforward for the buyside to take research from these firms. Our studies have shown that not only is there a marked increase in the number of these firms but also they are scoring higher on fund managers’ rankings”.

However, some market participants see commission-sharing agreements as a halfway house and would instead prefer adherence to Myners’ original recommendations that stated “clients’ interests would be better served if fund managers were required to absorb the cost of commissions paid, as this would provide appropriate incentives for fund managers to manage these costs”.

Richard Balarkas, chief executive and president, Instinet Europe, said: “Commission-sharing agreements are not a satisfactory answer. I would argue that while they can facilitate the separation of a bundled commission into two separate payments – one for execution and one for research – they are insufficient to ensure true unbundling.

“What needs to happen is for the trading desk to have complete control of the broker list for execution and choice of broker for each trade. At the moment, this is not the case and the power base in many fund management groups is still the portfolio manager. They are using trading commissions to pay for non-execution services such as research, company access and initial public offerings.”

Chris Angel, a principal at Mercer Sentinel, said: “According to the Oxera report, commission-sharing agreements have achieved the transparency and separation that the FSA requires but they fall short of total unbundling. Pension funds may have a better idea of where the money is going but they now have no control.
“Also, while commission rates have fallen, it has not been that much, with the average bundled commissions still costing around 12 to 18 basis points. This suggests fund managers are still paying too much for research at the investors’ expense.”

Putting a value on research, though, has been an age-old problem for fund managers. Very often, a 30-second call from an analyst may be most valuable, while the stacks of reports that clog the inbox are worthless.
Jim Connor, director of European investment management services at Navigant Consulting, said: “It is not simple and there is no perfect model. You cannot underestimate the price that a fund manager will pay for being first in the queue for a call or to receive good quality investment ideas.

“The other factor is the increase of dark pools and where they fit in a commission-sharing agreement. I think this will eventually lead to managers re-evaluating their strategies and this could facilitate further unbundling.”
What is unlikely to happen though is that fund managers will pay for the research from their profit and loss account. Tim Tanner, equity business manager at Aviva Investors, said: “Commission-sharing agreements are just a step in the evolution of unbundling, but they are not a complete solution. The question of whether fund managers should pay from their P&L has been on the agenda for a long time and there have been several conferences on the subject. I do not see it happening in the near to medium term as it would have significant implications for a fund management company’s profitability.”

Richard Phillipson, a principal at Investit, said: “I do not see the model changing as asset owners have not applied the pressure while asset managers have so many other things to think about in this environment.
“However, I think if fund managers were paying out of their own pocket they would try to be more careful about what they spent.”

© Efinancial News 2009, www.efinancialnews.com

Defeated Porsche axes CEO to make way for VW merger

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Porsche conceded defeat in a month long power struggle with Volkswagen in July by axing its embattled CEO, paving the way for VW to merge with the maker of the 911 sportscar. As a way to improve its negotiating position with Volkswagen, Porsche also said it would raise at least €5 billion in equity as the two companies prepared to create an “integrated automotive group.”

Volkswagen said it planned to buy a stake in Porsche AG, the company’s financially healthy sports car business, and “gradually” expand this over time. VW and Porsche would be fully merged by mid-2011, said Christian Wulff, premier of Lower Saxony, the German state that is VW’s second largest shareholder.

He said the Gulf state of Qatar is set to buy a financial derivatives package that controls 17 percent of VW shares, in a further move to ease Porsche’s financial woes. It could expand its stake by acquiring non-voting preferred shares. Porsche amassed more than €10 billion in debt during a botched attempt to build a 75 percent stake in VW. Weighed down by the debt, Porsche was forced to abandon further stakebuilding earlier this year and negotiate a merger instead.

Disagreements about how to structure a deal held up negotiations. Porsche’s veteran CEO Wendelin Wiedeking, opposed a sale of Porsche to VW, clashing with Ferdinand Piech, the 72-year-old chairman of VW and grandson of Porsche’s founder, Ferdinand Porsche.

Europe’s star performers guide clients in turmoil

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To describe the past year as “difficult” for traders would be an understatement. The collapse of Lehman Brothers in September unleashed a tidal wave of volatility that sent traders running for cover. Trading strategies were blown apart, the hedge fund industry crumbled and it was touch and go whether the global economy would follow suit.

As if that weren’t enough, laws aimed at liberalising Europe’s financial markets were adopted, leading to the launch of many execution venues. Managers were faced with grasping the complexities of a new market structure, even as they dealt with the ravages of the worst recession in 70 years. Electronic trading specialists had to guide their clients through the turmoil, and prepare them for a return to the markets. Here we profile the heads of trading at five of Europe’s biggest equities trading houses.

Phil Allison

Head of European client trading and execution, UBS

UBS led the pack at Financial News’ buyside equity trading awards last year, taking four of the main gongs, including best global equities trading house. Allison, the youthful head of the bank’s European trading division, puts this success down to an unusual focus on client needs. He said: “The heart of our business is our clients. Each client is unique and as such demands specific coverage.”

Allison joined UBS in 1997 as an options trader after graduating in mathematics from Cambridge. He moved across the pond in 2000 to launch the bank’s US exchange-traded funds trading business, returning to London two years later to start up client algorithmic trading. The moves allowed Allison to understand the breadth and culture of the business.

A year into his job, Allison is pushing for greater adoption of technology to address the challenges of sourcing liquidity and managing risk. He said: “A human may be best for pricing large blocks for clients, but a computer is usually better placed to unwind a large portfolio trade.”

He is also looking to capitalise on the changing needs of clients, who are scattered across much of developed Europe. He said: “Many clients have been changing dramatically over the past couple of years, and so has our service to them.”

UBS lost its crown as Europe’s best brokerage for equity trading and execution according to Thomson Reuters Extel, although the bank still came a respectable second.

Brian Gallagher

Head of European electronic trading, Morgan Stanley

Gallagher had something of a baptism of fire in his current role, flying into London on September 15 – the day Lehman collapsed and alternative equities market Turquoise launched.

Events have hardly slowed since, but Gallagher has taken comfort from his experience of similar structural change in the US. There, he learned of the pros and cons of market fragmentation, including the problems of accessing liquidity when stock markets split.

He said: “The opportunity to come to London was a no-brainer because it allowed me to leverage my US experience and help Morgan Stanley identify the challenges. The same story is unfolding here, but three or four times faster.”

Gallagher’s strategy is to educate clients on how to use technology effectively and ensure they understand the range of available products. He said: “Algorithms take a historical view on markets, and can also be very commoditised.”

That equivocal attitude has not prevented him from launching other algorithms, including Night Owl, which interacts with both lit and hidden liquidity. Gallagher said the trading division had held up well amid the turmoil, seeing fewer redundancies than other desks.

Rob Maher

Head of AES sales in Emea, Credit Suisse

Maher joined Credit Suisse’s renowned Advanced Execution Services division in New York in 2002 as one of its original members. Before that he served as head of e-commerce and electronic trading at Robertson Stephens, a San Francisco-based boutique investment bank that was focused on technology firms.

The US experience was as invaluable to Maher as to many of his rivals when he made the switch to Europe last year with his wife and three children. Maher took over the European mantle after electronic trading heavyweight Richard Balarkas jumped ship to agency broker Instinet Europe.

Maher has focused on technology and promoting the bank’s full-service offering, spanning research and prime brokerage. He said: “Technology is the life-blood of the business. Anything it makes sense to automate, we do.”

The division has continued to invest throughout the turmoil, committing to a multi-million dollar infrastructure investment last November, before pushing into the Middle East in April with services that allow clients to trade directly on stock exchanges in Dubai and Abu Dhabi for the first time. Maher is also moving into new asset classes such as foreign exchange, options and futures.

Credit Suisse surged up the annual Thomson Reuters Extel rankings this year, snatching the title of best European brokerage for equity trading and execution from rival UBS, after coming fifth the previous year.

Rob Flatley

Global head of electronic equity execution, Deutsche Bank

Deutsche headhunted Flatley from Bank of America in 2006, where he had masterminded a push into algorithmic trading and direct market access after the NYSE moved sharply towards electronic trading.
Flatley has since positioned the German bank to take advantage of its core strengths, including substantial German retail flow and equity finance. He has also sought to profit from the transformation of the European market and wild swings in volatility, using new algorithms and with a focus on market structure and execution coaching.

Deutsche Bank was third in Thomson Reuters Extel’s annual brokerage rankings, edging out Citigroup and Bank of America Merrill Lynch.

An accountant, Flatley moved into technology in the 1980s, and has taken “every job in the industry”, including support and product management. Before joining BofA, he spent three years as chief operating officer at Boston-based software company MacGregor, which has been credited with building the first global order routing system.

Flatley said: “There is no college course for electronic trading, so people come from a variety of backgrounds, including technology, sales, exchanges and trading. Those who do well tend to be curious about market structure.”

Jack Vensel

Head of electronic trading for Emea at Citigroup

Recruited by Richard Evans, the star trader and a founder of the equity trading platform Turquoise, Vensel took on the top job in February after the departure of his boss amid sweeping job cuts.

A Harvard Business School graduate, Vensel served at electronic broker Instinet and US trading system Island before joining Automated Trading Desk, the US trading boutique bought by Citigroup in October 2007. In his current role, he has sought to give Citigroup’s electronic trading business a global look and feel, and help clients capitalise on its access to vast amounts of liquidity.

He boasts of Citigroup’s experience with smart order routers, and claims to give clients access to the same technology as its own traders.

He said: “We have taken the best algorithms from the US and moved them to Europe, and have also launched our US dark pool, Citi Match, in Emea.”

New clients are emerging in markets such as South Africa and Greece, although the bulk of European trading originates from the UK. Vensel’s sales background means he finds talking to clients the most interesting part of the business. He said: “I always found the market microstructure fascinating, and like to discuss where clients see markets going. People have tremendous ideas.”

© Efinancial News 2009, www.efinancialnews.com

CMB not yet tempted by foreign territories

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China Merchants Bank (CMB) has said it is not tempted to accelerate its international expansion through acquisitions as it opened a London office recently to broaden its overseas footprint. The opening of a London representative office by China’s sixth-largest lender follows its launch of a New York branch in October and the buyout of Hong Kong’s Wing Lung Bank in a $4.7 billion deal last year.

The UK government is keen to offload its shares in Northern Rock, Royal Bank of Scotland and Lloyds Banking Group, but some see more risks than chances. CMB is constrained by its capital. A 33 percent fall in earnings in the first quarter came as the bank was hindered by a relatively low Tier 1 core capital ratio. At 6.5 percent at the end of March, the ratio met regulator requirements, but was below the 9.5 percent to 10 percent range of big state rivals. Several investment banks had begun formally pitching CMB for mandates to handle the offering, sources had told reporters.

Analysts estimate an issuance of $3bn would lift CMB’s Tier 1 capital ratio to above eight percent and a bigger portion in Shanghai-listed A shares would reduce earning dilution, thanks to a 25 percent premium. CMB shares trade at rich valuations as it is seen as a high growth bank. Even after factoring in the potential issuance, the bank would trade close to three times 2009 book value, roughly 20 percent above its peers, and 16 times 2010 earnings, a 50 percent premium to peers average, analysts said.

Utilising the right market

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The global recession may have hammered oil and gas prices, but betting the right way in volatile markets helped Royal Dutch Shell Plc’s earnings in the second quarter.

Shell, the world’s second largest fully publicly traded oil company by market value, followed an industry trend of posting a drop in profit in late July due to lower crude prices, but exceeded analysts’ forecasts.

“The second quarter continued to be a strong underlying economic contribution – a volatile market is good for trading,” Shell’s Chief Financial Officer Simon Henry told reporters.

Shell’s rival BP Plc, when reporting earnings recently, said its trading performance in the second quarter was more normal after a “very strong” first three months of the year.

Crude prices slid to about $65 a barrel earlier in the year from more than $147 last year because of the recession, dragging down oil companies’ profits. But a more bearish market still brings opportunities to make money.

The crude market is in contango, a condition where today’s prices are lower than future prices. A company with access to storage can buy oil and simultaneously enter into contracts to sell it in the future, locking in a profit.

That has encouraged trading firms to store millions of barrels of oil, even on tankers at sea. Both BP and Shell have been active in storing oil on tankers in recent months.

“The contango play has continued with the second quarter, we continue to hold those positions,” Henry said. “We are still storing cargoes offshore.”

“We’ve also in the second quarter had a good contribution from our gas trading business in both North America and Europe.”

Besides trading on futures exchanges, BP and Shell are also active in the over-the-counter markets for physical oil and associated derivatives, which are estimated to be much larger in size than the futures markets.

Energy markets are coming under increased scrutiny from regulators. The US Commodity Futures Trading Commission aims to rein in speculation in energy and commodity trading. Britain’s financial watchdog said recently it and the UK Treasury met oil industry representatives in August to discuss market transparency and efficiency.

Freedom of access

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Shawna Lake discusses the impact of the recession on countries involved in the financial services industry, who have limited natural resources.

How has the current climate affected investments in St Kitts?

There has been a surprisingly high level of interest, but certainly a slowdown in the pace of existing projects – investors have been tightening their belts to brace for the long haul. They want to avoid total closure of their developments in the event that the economy does not rebound as quickly as predicted. We have not experienced a catastrophic shut down of major hotel projects, so we are continuing to be cautious and prudent as we move forward.

Why do you feel St Kitts and other small developing countries were described as “scapegoats” at April’s G20 summit in relation to tax evasion?

St Kitts, as well as many other small developing low tax jurisdictions around the world, was targeted at the last G20 summit as a culprit for the global financial crisis, and the result was the emergence of the OECD’s white, grey and black lists. The lists reflected countries that did not have the minimum of 12 tax information exchange agreements with the G20 countries. Something it did not reflect, however, was whether countries have laws providing for the collection of and accessibility of relevant account information in the event that a tax request is received from a tax treaty partner.

The list also failed to distinguish between countries with tax information exchange agreements meeting the OECD standard, and those that simply had old Double Taxation Agreements failing to meet the current international standard. The white list actually includes countries without the minimum number of 12 tax information exchange agreements meeting the OECD standard.

Many of the countries listed on the grey list, like St Kitts, were never approached by 12 OECD countries. We were approached by approximately four countries during the period between 2002 (when we made our commitment to the process) and 2009 (when this list was developed). Further, the OECD list did not reference the fact that the Federation of St Kitts Nevis has put in place legislation to allow for it to exchange civil and administrative tax information with a number of countries included in a schedule to the legislation.

Among the G20 countries there are loopholes within some of their own member countries’ political sub-divisions which put them at higher risk for tax evasion within their own borders. It also increases the likelihood of money laundering. This is primarily due to the lack of provisions in domestic laws requiring the collection of beneficial ownership information by registered agents or other financial service providers. If this issue is not addressed, the proliferation of Tax Information Exchange Agreements cannot solve the overall problem.

How do you think the OECD’s declaration of a level playing field has affected St Kitts? Would you suggest the DTA as a solution or another vehicle altogether?

The declaration only touched on one aspect, namely the issue of countries making commitments to their process. It did not address the fact that small developing countries are not offered the same mechanisms for exchange of information as countries with coveted resources, natural or otherwise. An agreement for the avoidance of double taxation is a huge asset not just to countries like ours, but also to investors who want to avoid being taxed both in their country of residence and their home country. There is the perception that low or no tax jurisdictions do not have any tax base whatsoever, but St Kitts does have a corporate tax base for corporations and entities operating within its jurisdiction.

Cross border trade in services is particularly important for the economic viability of small countries like St Kitts. Developed countries should provide a responsible way for jurisdictions like ours to participate in trade on the international market. The use of double taxation treaties with the information exchange component is an excellent model or in the alternative some other form of bilateral investment treaty.

Why do you think the G20 countries have failed to negotiate meaningful treaties? Do you think they need greater motivation from a source as yet unidentifiable?

Canada and the Nordic countries have been more progressive in their approach to small developing countries by offering double taxation agreements or benefits within their laws that provide the same effect.

Others, however have taken a more aggressive stance to force small, vulnerable economies into compliance by simply threatening sanctions as opposed to offering mutual benefits. The simple answer is, if you can get what you want without giving anything back, why not!

What do you see as the way forward for St Kitts?

St Kitts is continuing to request double taxation agreements or other forms of tax exchange agreements with mutual benefits. We want them to include trade and investment components, ensuring that we are able to participate in the world economy.

If small developing countries are provided with the opportunity to have meaningful tax information exchange agreements which incorporate mutual benefits, this would be a tremendous first step. If the panic and finger-pointing continues, these countries will be pushed below the poverty line, resulting in more international instability than we are seeing today. It can also, in a worst case scenario, result in some of these countries being taken advantage of by countries that are not responsible international players.

Do you see a one-size-fits-all solution as the way forward as regards both DTAs and TIEAs? Canada’s TIAE model gives limited double taxation relief for countries it has tax information exchange arrangements with – do you see this working across the board?

There are some OECD countries that offer the threat of defensive measures as the reason why we should sign TIEAs with them. This has caused concern for small nations like St Kitts. St Kitts has laws in place that provide for exchange of information for criminal tax matters once a request is made through our Financial Intelligence Unit, so we do not require tax information exchange agreements for requests for information from any country worldwide for criminal tax cases. However for civil and administrative tax information exchange, this involves a higher level of cooperation and coordination between the revenue agencies of two countries. An information exchange agreement for non-criminal tax matters should therefore include some mutual benefit for both countries if they have expressed a desire to work together. Different countries have different things to offer. I will be the first to say that criminal tax information exchange should not even be dependent on an agreement; it should be provided for in a country’s laws, which is the case in St Kitts. Canada took an extremely progressive approach, which meant that some countries within the Caribbean region looked favourably to negotiate TIEAs with them. The Canadian model is one worthy of attention by other OECD and G20 countries as a good example of a developed country helping developing countries to become more self sufficient nations rather than countries merely thriving on handouts.

For further information Tel: (869) 465 1153;
Email: ceo@stkittsipa.org; www.stkittsipa.org

Securing business opportunities in Libya

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Libya is the fourth largest economy in Africa. It has a rich culture, varied landscapes, a strategic position and the continent’s largest oil reserves. Once shunned by the international community for its involvement in the 1988 bombing of PanAm Flight 103 above the Scottish town of Lockerbie; its nuclear weapons programme; and its support for various militant groups, Libya began making amends with the world in 1999. The country is now out of political isolation and full of potential. Potential which the UK Government and European leaders should help the Libyans harness for a variety of economic, strategic and humanitarian reasons.    

For the past decade, international firms have been lining up for a greater share of the opportunities presented by Libya’s reintegration into the global economy. Much of the interest has been in the oil and gas sector, which accounts for 95 percent of the country’s export revenues and one quarter of GDP. But opportunities have also been identified in the tourism, construction, education and financial services sectors.  

In response to all this interest, the government has begun to overhaul the country’s socialist economy to enable and encourage trade and investment. State-owned enterprises have been privatised; the banking system has been commercialised; and the Central Bank has been reinvented as a supervisory organisation, as opposed to a controlling one.

With this, the widespread dismantling of barriers to trade and investment, and the country’s broader programme of legal and administrative reform, Libya is making itself a much more attractive place to do business, and companies are responding accordingly. UK visible exports to Libya, which are principally industrial machinery for the oil and gas sector, have risen by 35 percent in the past ten years. Over that period, UK imports from Libya have increased sevenfold and both inwards and outwards investment have risen sharply.

Libya has made great progress in the past decade. But there is clearly more that can be done to encourage further progressive reforms and greater returns for the business community in Libya, the UK and elsewhere.

Firstly, the European Commission should accelerate negotiations to establish a Framework Agreement between the EU and Libya. Officials have been given a broad mandate to negotiate a pact that will enhance political, economic, cultural, social and security cooperation between the two partners. This is a positive step and discussions have progressed well to date. However, the substantive details of a draft agreement are yet to be agreed, or even discussed in some areas, and the devil, as everyone knows, is in the detail.

It is in Europe’s interests to negotiate a comprehensive and ambitious agreement, and to do it quickly. Not least because getting in early will provide European businesses with a first-mover advantage that one expects will pay dividends in a relatively short period of time.

Negotiations stand to assist Europe to take forward a number of key policy objectives. Underpinning cooperation with Libya on energy issues should provide Europe with a reliable partner to meet long term energy requirements at a time when alternatives are in increasingly short supply.

It is not just in terms of energy supply that Europe stands to gain. The Libyan government has expressed a strong desire to further cooperation on key components of the climate change agenda, working with Europe to improve Libya’s energy efficiency and develop its capacity in renewables.

An agreement should also boost cooperation with the EU towards preventing illegal immigration, a key stepping stone towards reducing of the misery associated with human trafficking between Africa and Europe via Tripoli.       

Libya’s further integration into the global community will help to safeguard the security of the Mediterranean region and to strengthen our relationship with a country that plays a leading role in the Arab world and in the African continent, a position that was consolidated by its recent appointment as Chair of the African Union.

Secondly, the UK and Europe should support Libya’s bid to become a member of the WTO. The legislative, policy and institutional changes that Libya would be required to make in order to join the organisation would ensure that the country develops an operating system that is truly ‘fit for purpose’. It would discipline the Government in its dealings with the private sector, and, since WTO commitments are binding, create a more predictable, secure and enticing business environment for internal and external investors alike. Membership would provide Libyan businesses and consumers with a broader range of competitively priced goods and services. They would also benefit from greater competition and the levels of investment required to stimulate innovation, diversification and the more efficient allocation of capital throughout the economy.

Libya’s WTO aspirations and its interest in negotiating a bilateral pact with the EU present real opportunities for business, consumers and taxpayers throughout the EU. We should hope that decision-makers in London and Brussels recognise this and engage accordingly.

Mike Pullen is a Partner at DLA Piper and head of the firm’s International Trade Practice in Europe, the Middle East and Asia. He is also a Board Member of the Middle East Association.

The right man for the job?

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Immensely popular with the country’s black majority, President Jacob Zuma will need to fight off the taint of corruption that hangs around him if the country’s economic affairs are to be turned around.

Described as unsuitable to lead South Africa by Archbishop Desmond Tutu, it seems that the electorate thought otherwise – Zuma is South Africa’s fourth black president. A self-taught Zulu farm boy (he only learnt to read and write while in prison on Robben Island) with an instinct for trouble, he has attracted many epithets during his controversial life, but dull is not one of them. His signature tune, after all, is called “Bring Me My Machine Gun”.

Among his more attractive qualities are his ability to connect with the downtrodden and his irrepressibility. But this is overtaken by a longer list of unattractive qualities and serious gaffes, such as his tendency to shoot from the hip, his dislike of gays and his casual attitude towards AIDS.

He has faced corruption charges, and when on trial for raping a 31-year-old family friend, his admission that, despite knowing the woman was HIV positive he had not used a condom, opting instead for a “vigorous” shower, made him a laughing stock – particularly as he was head of the country’s National AIDS Council at the time. There are many who regard Zuma’s presidency with trepidation. He has advocated tackling criminality by reintroducing the death penalty and has said that legal aid should be denied to those accused of serious crimes. His international reputation has been tarnished by alleged links to Mbokodo, the disciplinary arm of the ANC which is said to have been involved in torturing those who stepped out of line.

Yet the allegations surrounding Zuma have done nothing to diminish his popularity among the grass roots due to his impoverished childhood and the fact that he is a Zulu, the country’s biggest ethnic group (Mandela and Mbeke both had Xhosa backgrounds). His political awakening came when he joined the ANC’s armed wing when he was 16, and a 10 year prison sentence on Robben Island and deportation to Mozambique followed. He returned to South Africa from exile in Zambia after Mandela’s release in 1990.

When Mbeki became Mandela’s successor, Zuma became deputy president of both the party and the country and, somewhat ironically, head of the National Aids Council. But relations between the two quickly began to unravel, particularly as Zuma’s ebullient behaviour contrasted so heavily with Mbeki’s. Zuma’s alleged involvement in a number of corruption scandals also brought unnecessary – and unfavourable – attention onto Mbeki’s leadership.
In June 2005 Zuma’s former financial adviser Schabir Shaik was jailed for trying to solicit a bribe on his behalf from a French weapons company in an arms procurement deal. By October of that year, Zuma himself had been charged with 16 counts of corruption linked with the arms deal.

At an all-time low, he turned to trade unionists, the Communist Party and the ANC Youth League – all those who had been alienated by Mbeki’s conservatism – insisting he was the victim of a political conspiracy. As a result, he was able to turn the tables on Mbeki, becoming president of the ANC in 2007. Mbeki resigned as president of South Africa last year. All the charges against Zuma were dropped earlier in April prior to the election, although the fact he has never been acquitted means a cloud of suspicion hangs over him. His woeful views on AIDS and homosexuality are also major concerns, particularly as South Africa has the world’s largest HIV/AIDS population.

As Zuma celebrated his victory, it was left to Archbishop Desmond Tutu to capture the country’s ambivalence towards its new leader. Describing his presidency as a hiccup, he insisted South Africa had survived worse. “It will clear our throats and we’ll be okay, we’ll sing again,” he said.

Crude awakening

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Global recessionary fears have compelled many normally very reliable investors to begin to worry about depleting asset values right across investment classes, where many equities pose a prime concern for the current markets. We have seen many long term, high performing financial giants being forcibly removed from the face of the financial world, despite being perceived as the lords among the investment community. The impact of the financial crisis in the Middle East varied significantly from one economy to the next. Surprisingly early impact was visible in countries with strong links to the wider, global financial markets.

The negative impact started spreading to what were recognised as relatively well protected regional economies during the second half of last year – with commodity prices, especially oil prices, crashing to multi year lows from record highs. Oil dependent economies took a great deal of the toll with their equity indices falling by around 40-50 percent, on average. Stock indices in oil rich Gulf Cooperation Council (GCC) countries saw declines of between 30-60 percent in the last quarter of 2008 alone. In response, we have seen policy makers from across the world proposing various different qualities and quantities of monetary or fiscal stimulus plans to maintain liquidity and support their economies and stock markets.

All of these concerns and opportunities lead to one overarching question of fundamental importance: Where should fund managers deliver returns in order to make the most of the situation, effectively minimising risk?

United Securities, a leading financial powerhouse, told World Finance that the answer to this million dollar question lies in the ability to extend ties within the regional equities markets.

According to Mustafa Ahmed Salman, CEO of United Securities “GCC equities, at this stage, offer the right investment asset class opportunities at the cheapest price ever.” This may ring false to many commentators and investors alike, who, granted, would be right in assuming that the GCC story is all about oil prices, which of course at this point in time are heading for record lows.

But there are many more unexplored opportunities and areas of potential within and across GCC markets.

Oil revenue, budget deficit, growth
A basic concern arises when we think of oil as the prime generator of revenue for many GCC states. Given the dependency on oil revenue, other infrastructure and development activities undertaken in the region move in tandem with average oil price realisation for many of these economies. The sharp and rapid deterioration in oil prices since last summer put an end to the latest GCC oil boom, that dates back to early 2003. Oil prices plummeted by more than two thirds from the lofty peaks recorded last July. This drop over the following six months washed away all the gains attained over the previous 30 month period for crude oil. The recession in the world economy, mainly in the more advanced countries, will inevitably continue throughout 2009, leaving less room for any significant short-term recovery in oil prices. To defend oil prices and secure their oil revenue streams, OPEC members have cut the cartel’s production by around 4.2 million barrels per day (mbpd), since last September.

Rising oil revenues over recent years have enabled GCC countries to achieve record surpluses in their government budgets, and add to their holdings of foreign assets. Combined budget finances of GCC countries moved from a deficit of around $7.4bn in 2002, to an estimated surplus of $220bn in 2008 (21 percent of GDP). These surpluses were achieved despite large increases in governmental expenditures.

The 2009 anticipated combined deficit in GCC budgets is considered modest (around $16bn) if compared to the size of accumulated surpluses around $2trn over the previous seven years.

The most important thing is that unlike the oil boom in the 1980s, GCC governments are exercising more discretion and flexibility in determining the appropriate levels of expenditure. At the beginning of the last oil boom, GCC governments saved most of their surpluses. There is a strong belief that government spending will continue, though at a slower pace. Oman announced a 10.8 percent increase in spending in 2009 compared to the 18.6 percent increase budgeted in the previous year. Similarly, the UAE’s 2009 budget shows a 9.2 percent increase in expenditures compared to 31 percent in the previous year.

Mr Hassan Ali Jawad, MD of United Securities, says he expects oil prices to recover towards the last quarter of 2009, as the ongoing stimulus and liquidity injection by governments regionally and worldwide would start boosting investors’ confidence and increase economic activity. Prices will also benefit from the recent cuts in OPEC supply which might cause a short term supply crunch. Futures markets suggest that OPEC crude prices are expected to reach around $70 per barrel in 2010, which significantly exceeds the costs of oil production in GCC countries and the breakeven prices that would balance their budgets.

Consequently, most Gulf countries are expected to see surpluses in their budgets next year, compensating for any deficits incurred in the current year. Overall, there are high expectations that investment activities will continue to develop, albeit at a slightly slower pace than would usually be expected.

With the potential for various opportunities lying ahead in the almost-immediate future, the need for a tried and tested financial advisor in the region is of utmost importance, particularly in order to get the timing right. United Securities, one of the leading financial powerhouses in the Middle East, has been serving clients across the globe for the last two decades. With headquarters in Muscat, Sultanate of Oman, United Securities is one of the leading financial intermediaries operating in the Middle East and North African (MENA) capital markets. It provides investment consultancy and brokerage services in the MENA equity markets, asset management, corporate finance, and equity research. It is a fully licensed company that provides a wide range of financial services to local, regional and international clients with discretionary assets under management in excess of $120m.

United Securities finds its strength in a team of young, talented, and confident individuals. Highly qualified professionals carry out different functions under the guidance of highly experienced and well informed promoters, Mustafa Ahmed Salman and Hassan Ali Jawad. The flexibility of the company in changing its strategy according to situations and the adaptability in implementing those strategies had helped it in withering the crisis with ease. It maintains its commitment to providing the highest standards of financial services to its clients. The research reports from United Securities command a great degree of respect among the investment community in many MENA markets. The research strategy is built upon years of experience and testing which have helped to understand the regional markets and functions.

Regional brokerage division
Through its subsidiary companies in Egypt and Saudi Arabia, and a number of well established professional associates spread across the region, United Securities is extending its MENA capital markets brokerage services to a large number of institutional as well as retail clients.

The firm’s associations with big names in the region, such as Damac Investments, Al Rajhi Group of Saudi Arabia and Shuaa capital of the UAE, provide their customers with much needed confidence in dealing with them.
Focus on a customer-first attitude, ethical and transparent business practices, respect for professionalism, research based value investing, and technological innovation has enabled the company to blossom into the broker of choice in this well established and highly regarded region of the world.

Global services
The firm believe that diversification is all about correlation and not the number of assets one has at hand. Relying on this as one of the major strategic pillars, United Securities has spread its wings to expand well beyond the region. The company is licensed to act as a direct Foreign Institutional Investor (FII) in the Indian Capital Markets. It is registered as a Foreign Institutional Investor with the Securities and Exchange Board of India, the apex regulatory body for investments in the Indian securities market. It offers different kinds of investment platforms to its customers through sub accounts, as well as trading accounts, for investing in the Indian Stock Markets.

As part of their recent ambitious growth, they recently extended many of their services by enabling clients to invest in the US financial markets as well. They have tied up plans with globally recognised names for dealing in the US markets. Investors can now create partnerships with the company for their investment needs in the western hemisphere, spreading their opportunities worldwide.

United Securities believe that the economic expansion of GCC countries is here to stay for longer time period. The governments are keen on developing the region as a key financial, tourism and investment destination in the MENA region. Increased spending of the governments towards achieving this goal is expected to keep corporate profits in the growth trajectory. Historically positive fiscal balances accrued from higher oil prices is the most supportive factor, whilst the diversification of revenue streams are expected to support consistent GDP growth.

They are well known for believing in informed investment decision making and therefore keep investors informed about the market, as well as the economy in general, by producing Macro as well as Micro economic reports, with sector as well as company specific reports. These reports enable the client to keep updated and take appropriate decisions in good time. They are available in global information vendors such as Bloomberg, Reuters as well as CapitalIQ.

Danger on the high seas

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Ever since ships first set sail, pirates have followed in boats to claim the cargo. Piracy is an age-old problem, and it does not look like receding when there are golden opportunities to exploit from heavy sea traffic and inadequate policing in one of the world’s busiest shipping lanes – the Gulf of Aden, which leads to the Suez Canal and connects the Far East with the Mediterranean.

A dramatic increase in attacks by Somali pirates has led to a near doubling in the number of ships attacked during the first quarter of this year compared with the same period in 2008. According to a report issued by the International Chamber of Commerce’s International Maritime Bureau (IMB) there was a total of 102 incidents reported to the IMB Piracy Reporting Centre (PRC) in the first three months of 2009 compared to 53 incidents in the first quarter of 2008. The quarterly report also said attacks increased by almost 20 percent over the same period last year.

The increase in the first quarter of 2009 is due almost entirely to increased Somali pirate activity off the Gulf of Aden and the east coast of Somalia. The two areas accounted for 61 of the 102 attacks during the first quarter compared to just six incidents for the same period in 2008.

Last year pirates hijacked 49 ships, took 889 crew members hostage and fired on another 46 vessels, according to the IMB’s Piracy Reporting Centre, with 111 incidents taking place in the Gulf of Aden off the coast of Somalia. Furthermore, the types of attacks have changed, with pirates – more heavily armed than in previous years – attacking larger ships and going farther out to sea.

The IMB reported that in the first quarter of this year worldwide a total of 34 vessels were boarded, 29 vessels fired upon, and nine vessels hijacked. A total of 178 crew members were taken hostage, nine were injured, five kidnapped, and two killed. In the majority of incidents, the attackers were heavily armed with guns or knives. In addition, violence against crew members continued to increase.

Forty-one incidents were reported in the Gulf of Aden region, including the hijacking of five vessels. In January 2009, one in every six vessels attacked was successfully hijacked, with the rate decreasing to one in eight for February 2009 and one in 13 for the month of March.

On average, one in eight vessels attacked was hijacked during the first quarter. The last quarter of last year saw a total of 41 incidents, in which the ratio was one in three vessels attacked being hijacked, the IMB reported.
Piracy risk is not just confined to the Gulf of Aden and Somalia. Nigeria continues to be a high risk area. In the first quarter the IMB received reports of only seven incidents, although unconfirmed reports would suggest that at least a further 13 attacks had occurred in the same period.

Oiling the spoils
Nearly all incidents have taken place on vessels supporting and connected to the oil industry. The IMB is urging vessels to report any attacks so that the Nigerian authorities can better prioritise and resource their law enforcement agencies to respond quickly and efficiently.

One marine risk consultant at a large European insurer says that “under-reporting from vessels involved in attempted – or actual – piracy incidents is still a great concern. Many vessels dismiss the idea that pirates have followed them or tried to engage as just boats that have come too close to them. The real reason may be a lot more frightening. Any boat that speeds up on approach or that circles the ship, for example, should be reported to the authorities.”

However, some countries have made great strides in reducing piracy risk. Indonesia, which held the record for the highest number of piracy attacks between 2003 and 2007, saw only one incident reported in the first quarter of 2009, compared to five incidents in the corresponding period in 2008.

The Malacca Straits – a major strategic trade route and another former piracy hot-spot – has reported only one incident this quarter. The drop in attacks is due to increased vigilance and patrolling by the littoral states (Indonesia, Malaysia and Singapore) and the continued precautionary measures on board ships.

The situation has also improved in Bangladesh (Chittagong) and Tanzania (Dar es Salaam), with a slight decrease in the number of incidents reported in the first quarter as compared to the corresponding period last year. During the same period this year, only one incident was reported for Bangladesh compared to three during the same period last year. Vessels calling at Tanzania reported two incidents as compared to four during the same period last year.

Insurers and risk experts suggest that piracy risk has moved from Far and South East Asia to Somalia and the Gulf of Aden. Malaysia and Singapore have worked well with the Indonesian authorities to cut down on piracy around Indonesia and the Malacca Straits.

However, such co-operation does not appear to be an option in the Gulf of Aden and Somalia, say insurers. As Somalia is virtually lawless and without an effective government, there are no agencies there that are prepared to police against pirate attacks.

As a result, insurers can only foresee a worsening situation in the area.

Increased presence
In response to the increased frequency of pirate attacks, several nations—including the US, the UK, other European Union Member States and other countries —have increased their naval presence in the Gulf of Aden, which vessels must traverse to get to the Suez Canal. But the logistics are against effective naval intervention.

The targeted area now encompasses over a quarter of the Indian Ocean, which means that it is impossible to police.
The alternative route to using the gulf – steaming around the southern tip of Africa – would add around two to three weeks to the journey time, and would hike transportation costs.

In mid-December 2008, the UN Security Council approved a resolution allowing countries to pursue Somali pirates on land as well as at sea – an extension of the powers countries already have to enter Somali waters to chase pirates.
But as long as Somalia continues to exist without an effective government, many believe lawlessness within the country and off its lengthy coast will only grow.

Some countries have tried to take matters into their own hands. While there is no international legal system for people accused of piracy, some states have started to put pirates on trial, such as in Kenya and France. The US, while also threatening pirates with criminal prosecution, has also started to meet the problem with force. When the Maersk Alabama was captured in April and the ship’s captain was held for ransom, US Navy Seals intervened and shot dead three pirates.

As the number of piracy incidents increase, marine underwriters are looking to cover piracy under war risk policies rather than the current hull and machinery coverage. According to those working in the London market – which underwrites most marine risk policies – in about 80 percent of cases, piracy is moving in this general direction.
Before 1983, piracy generally was covered under war risk policies and excluded from hull policies but since then, it has generally moved back into hull coverage.

In 2005, the Joint Hull Committee of the Lloyd’s Market Association introduced optional clauses that excluded piracy from hull policies and were intended to transfer the peril back to war risk. However, most underwriters did not adopt the optional clause, largely leaving piracy to remain under hull policies.

Marine insurers now want that to change. They want to see piracy risk moved into war insurance policies, as is the case in countries like Japan, Sweden and Norway.

War risk policies are typically paid per transit and underwriters often charge additional premium for trips through high-risk areas. The Gulf of Aden has been on the LMA Joint War Committee’s high-risk list since May 2008.

Increased insurance
Underwriters and other observers say the transition to war risk coverage of piracy risks could be helpful for insurers and policyholders alike because it would clarify ambiguity about how piracy is covered. Currently, shippers that do not have separate kidnap and ransom insurance often have piracy ransom covered by “general averages”, a voluntary agreement by the owner, charterers, insurers and other interests to pay a proportionate share of a vessel’s expenses. A declaration of general averages is made in cases of extraordinary sacrifice made to save a ship, cargo or crew – such as jettisoning cargo during an emergency. As a result, it can be difficult to determine what level of exposure insurers have to such risks under such policies. Moving piracy risk to a war insurance policy would help clarify this, say insurers.

But transferring these risks from one policy to another is not going to ring-fence insurers from receiving large claims, or from legal action because of disputed claims arising from piracy. In April Amlin, part of the Lloyds’ market, announced that it is facing an £8.9m claim after Somali pirates hijacked a tanker loaded with biodiesel. It is also claiming damages and interest running at $2,920 a day.

The ship, Bunga Melati Dua, was on its way from Malaysia to Rotterdam when it was attacked by pirates last summer while travelling through the Gulf of Aden. One of the crew members was killed during the attack, and the remaining crew were taken, with the vessel, into Somali waters.

Six weeks later, Malaysian shipping line MISC Berhad paid a $2.7m ransom to the pirates for the return of the ship, and her sister tanker Bunga Melati Lima, hijacked ten days later. The crew of 29 Malaysians and ten Filipinos had been held with the 32,000 tonne ship during its captivity. The pirates released the vessel after owners paid the ransom and she arrived in Rotterdam on October 26 where her cargo was placed in storage.

Now, Swiss commodities trading company Masefield AG is suing Lloyds underwriters Amlin Corporate Member over her cargo.
Masefield says as soon as the pirates seized the ship the two parcels of palm oil became a total loss, and that it served a “notice of abandonment” on September 18, seeking payment of its value from insurers. But according to a High Court writ, Amlin has breached its insurance deal by refusing to meet Masefield’s claim.

In its writ, Masefield says that when the cargo was discharged at Rotterdam, it could not be sold immediately: with the approach of winter, the amount of palm oil that can be blended with other oils to make biodiesel falls and its price drops dramatically.

The cargo is currently being stored until it can be sold on behalf of insurers for a reasonable price, the writ claims. Amlin says that it is defending the claims vigorously.

One insurer in the London market who asked not to be named says that the number of disputes between insurers and their insureds is likely to grow until policy wordings are clarified and piracy is moved to war risk insurance.

“At the moment, there is a problem with the percentage of liability that insurers and their clients carry with regards to piracy risk, as each incident can trigger clauses in their hull and machinery policies, war insurance policies and cargo policies. Furthermore, these can be underwritten by several insurers. The easiest solution for the insurance industry is to move piracy to just one policy – war insurance – where it can be covered by just one insurer. Then, insurers and their clients are clear about what risks are being covered and to what degree.”

The land of smiles and permanent revolution

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A country rich in natural resources, Thailand is unique in its region due to having never been ruled by a foreign power. Despite recent news that the new military government is changing investment laws that would make it harder for foreigners to control Thai companies, it insists it is simply closing a loophole in existing policy, and that foreign manufacturers, exporters or companies with investment privileges would be unaffected.

Although experiencing continued political turbulence, Thailand’s fiscal situation remains strong and, with a focus on attracting private investment, a strengthened financial sector, and a trade balance surplus in the first quarter of 2009, the country stands in good stead to withstand the global economic crisis.

  • 1932 saw a westernised military elite stage a coup d’état and forced the king to accept the role of constitutional monarch.
  • In 1939, Phiban came to power, a nationalistic ruler, changing the country’s name from Siam to Thailand.
  •  The 1990s witnessed increasing private participation in the telecommunications sector, as state monopolies began to grant concessions to private operators. In fixed line services, concessions were granted to two private operators, True and TOT.
  •  Between 2002-2004, due to a highly developed infrastructure, free enterprise economics, and genuinely pro-investment policies, it became one of East Asia’s best performers with an average six percent annual real GDP growth.
  •  In 2005, the Telecommunications Business Law was amended which effectively raised the limit of allowable foreign ownership from 25 percent to 49 percent.
  • In 2006 Shin Corporation was purchased by Temasek Holdings in a controversial deal which saw Thaksin Shinawatra with a 49.6 percent stake. The biggest deal in Thai stock-market history was shrouded in secrecy and controversy.
  • September 2006 saw a military coup which ousted PM Shinawatra. Elections were held in December 2007, with Shinawatra’s People’s Power Party (PPP) emerging positively.
  •  In May 2008 anti-Shinawatra People’s Alliance for Democracy (PAD) began street demonstrations, occupying the prime minister’s office in August.
  •  In December 2008, Abhisit Vejjajiva was elected leader of the Democratic Party, according to results of a parliamentary vote. The new leader implements free market economics to encourage private investment.

Molotov cocktails were launched during New Year celebrations, as deadly riots broke out in support of Shinawatra. According to the NSDB the riots sparked losses of 220 million baht ($6.61m) in damage to public property and loss of state income, whilst Prime Minister Abhisit Vejjajiva announced that tourism was likely to fall by more than 102 billion baht ($2.97bn).

Barclays to generate £7.3bn

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Sure, it’s possible to
imagine better news – say £7.3bn in cash from a straight sale instead
of a mix of cash and a 20% stake in the enlarged US find manager. But
this deal would address the UK bank’s biggest problem: a perceived lack
of capital.

At first blush, selling all of Barclays Global
Investors might look like overkill. Barclays has already agreed to sell
iShares, the exchange-traded arm that contributes around a quarter of
BGI profits, to private equity house CVC. That deal would increase its
core Tier 1 ratio, the standard indicator of capital strength, from
6.7% to 7.3%.

A sale of the entire fund management division
for cash would bring Barclays’ core Tier 1 up to 8.4%. But the 20%
equity stake in BlackRock would probably cut the pure uplift to £4.2bn,
taking the ratio to 7.7%. Given that the asset manager is likely to
contribute more than last year’s 10% of pre-tax profits in 2009, some
investors might wonder if it’s worth it.

It is. While Barclays
should generate a healthy profit this year, it lacks the safety net
that rivals Royal Bank of Scotland and Lloyds Banking Group have
through their participation in the UK government’s asset insurance
scheme.

Investors cannot relax. If their bank makes the same
£8.7bn pre-provision operating profit as last year in 2009, that would
not be enough to absorb a likely £10bn bad debt charge. Barclays could
end up further eroding its capital base compared to RBS and Lloyds,
which both sport core Tier 1 ratios above 9%.

Barclays also
looks over-leveraged on a more basic yardstick, equity to total assets.
Its £1 trillion of total assets is 35 times its £29.4bn stock of core
equity, according to Nomura. RBS, Lloyds and HSBC are only 20, 23 and
26 times leveraged respectively.

Under the circumstances, more
capital is better than less. If capital strengthening is the main
motive, Barclays needs to sell something that will fetch a high price.
Offloading an asset manager with a low carrying value and a high price
tag – £7.3bn represents a stiff 11x forward pre-tax profits – fits the
bill.