Ifm volume 1 10 03 2014

IFM Independent Financial Magazine Issue 01 / 10 MARCH 2014

IPO Frenzy Will 2014 see the same boom of IPO’s as 2013?

EMEA - Europe, Middle East, Africa Africa’s Bright Future

EMEA - Europe, Middle East, Africa Scottish independence

Asia-Pacific Japan Economic Condition

The Chinese Credit Check The dreaded word for debt investors, default.

Finance in Sport The BIG Tax Case

Contents UK Capital Markets

IPO Frenzy

Will 2014 see the same boom of IPO’s as 2013?

Alan Konopka EMEA - Europe, Middle East, Africa

Africa’s Bright Future Jeremy Kempke EMEA - Europe, Middle East, Africa

Scottish independence : Part2

Uncertainty of financial institutions Why would they leave Scotland?

Alan Konopka

Asia-Pacific

Japan Economic Condition Abe is the man to kick start Japan

Name

Industry

Place of listing

Pets at Home

Pet Supplies/Retail

LSE

FatFace

Clothing retailer

LSE

House of Fraser

Clothing retailer

Card Factory

Cards & Gifts retailer

LSE

Zoopla

Online property search

LSE

Just Eat

Online delivery service

LSE

AO

Aplliances distribution and sale

LSE

Poundland

Discount retailer

LSE

Only Inst

Phones4U

phones purveyor

LSE

Exit strategy of private equity

4

Virgin Money

banking

King.com

mobile gaming

Coupons.com

digital coupon provider

Alibaba

On-line retail and wholesale

The Chinese Credit Check

The dreaded word for

debt investors, default.

5 6 7 8

Pete McCarthy

Finance in Sport

The BIG Tax Case Kristopher Connelly

TBC TBC / USA

Pete McCarthy

Asia-Pacific

LSE

9

Exit strategy of private

Double-d

Outperformed Debenhams

Owner of Prim Biggest technology

Bought Nort

Creator of Candy

TBC / USA TBC / USA or China

Alibaba's IPO might be one of the

IMPORTANT IFM magazine publishes information and ideas which are of interest to investors and students. It does not provide advice in relation to investments or any other financial matters. Comments published in IFM magazine must not be relied upon by readers when they make their investment decisions.

Investors/Students who require advice should consult a properly qualified independent adviser. IFM magazine, its members do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions.

Members of staff of IFM magazine may hold shares in companies mentioned in the magazine. This could create a conflict of interests. Where such a conflict exists it will be disclosed.

In keeping with the existing practice, reporters who intend to write about any securities, derivatives or positions with spread betting organisations that they have an interest in should first clear their writing with the editor. If the editor agrees that the reporter can write about the interest, it should be disclosed to readers at the end of the story.

Holdings by third parties including families, trusts, self-select pension funds, self select ISAs and PEPs and nominee accounts are included in such interests.

Editor Pete McCarthy Asia-Pacific

Co-Editor Alan Konopka EMA & UK Capital Markets

Creative Director

Jeremy Kempke

Michael Hutchison

Kristopher Connelly

EMEA

Designer Sarah Aoki

Finance in Sport

INDEPENDENT FINANCIAL MAGAZINE VOL.1

UK Capital Markets

IPO Frenzy Alan Konopka

I

nitial Public Offerings (IPOs) are believed to come in waves similar to Mergers & Acquisitions. When the economy is booming we see more of the unseasoned offerings and when times are bad and valuations are low, we see fewer IPO deals. There is however a clear distinction between reasons for large firm IPOs and those of small businesses.

Public offerings from big firms are usually used as an exit strategy of major private shareholders or private equity firms. Such a process allows the existing investor (or PE firm) to cash out at a profit.

The main reason for small businesses is to access the capital markets and by issuing new shares they can raise capital to fund future growth.

During 2013 we have seen a huge number of IPO’s with over 300 deals in excess of $100 million globally, relative to the 200 deals observed in 2012. Across the Atlantic, 2013 proved to be a tremendous year and was the best year for public offerings since the Tech-boom of 2000. Big brands such as Twitter (TWTR:NYSE) and Insys Therapeutical (INSY:NASDAQ) tapped the IPO space in 2013 raising a significant amount in the process. But 2013 was also very good year for British listings like Royal Mail (RMG:LN), which subsequently has gained over 80% in value since the offering in October.

Another well known company that went public was the Legoland operator, Merlin Entertainments (MERL:LN), which gained over 6% in the first day of trading.

Will 2014 see the same boom of IPO’s as 2013?

You could ask, why are last year’s deals so important to 2014? Well, primarily because the number of public offerings is going to increase significantly, and as an investor, you should prepare yourself to take the opportunity to benefit from some of the 2014 deals. But how should we go about separating those valuable pearls from the rest?

The key data to look for should be the firm’s profitability, the degree of competition, barriers to entry and its key shareholders. However not every company will have its income statement available to search for profitability.

However, before the planned listing the underwriter will issue a prospectus about the company that it underwrites, and this document can be a source of extremely valuable information for potential investors. Within the document, we can reveal any potential destabilising statements buried under the legal jargon.

‘Legal actions’ or ‘contingent liabilities’ are words fraught with danger and investors need to be wary of such actions.

These phrases might suggest that the company could face problems in the near future. If searching for phrases and items in the admission document seems like a dead-end task, investors should try to read as much information from analysts covering the company as possible.

Within the financial sector there are two types of analyst: the ‘buy side’ analyst and the ‘sell side’ analyst. The sell side analysts are typically the brokers who need to sell stocks to make money.

The reports from the sell side will be Place of listing

inherently biased given their business model. This is something one needs to be aware of when reading analyst reports.

If you see very emotive language that’s the time to step back and think, ‘why are they using these terms?’

You may now be thinking that it is too uncertain to play the IPO game and that it’s probably a wise decision to stick with established firms who have a proven track record. But the thing is, you don’t know what you’re missing!

In May 2014, investors will have the chance to get their portfolios expanded with TSB Bank that has been carved-out from Lloyds Banking Group (LLOY:LN); due to the European Commission terms of the bank’s £20bn bailout during the Great Recession. If you think that banks are too risky, you should have a look at the animal specialist retailer Pets at Home, which is due to be listed in the coming weeks as an exit strategy of the Private Equity firm KKR. With over 360 UK stores and no significant competitor, Pets at Home might be a good one to do your homework on. The only drawback that comes to mind, is the fact that the company is floated by a private equity firm who might try to squeeze every single ounce of value from the transaction.

If you want a piece of the pie, now is the time to jump aboard the IPO train.

But, be wary not to jump into the wrong wagon!

Name

Industry

Pets at Home

Pet Supplies/Retail

LSE

Exit strategy of private equity firm - KKR

FatFace

Clothing retailer

LSE

Double-digit profit growth

House of Fraser

Clothing retailer

LSE

Outperformed Debenhams during Christmas

Card Factory

Cards & Gifts retailer

LSE

Zoopla

Online property search

LSE

Owner of Primelocation website

Just Eat

Online delivery service

LSE

Biggest technology firm to list on LSE

AO

Aplliances distribution and sale

LSE

Poundland

Discount retailer

LSE

Only Institutional investors

Phones4U

phones purveyor

LSE

Exit strategy of private equity firm - BC Partners

Virgin Money

banking

King.com

mobile gaming

TBC / USA

TBC

Coupons.com

digital coupon provider

TBC / USA

Alibaba

On-line retail and wholesale

TBC / USA or China

Comments

Bought Northern Rock in 2012 Creator of Candy Crush Mobile App Alibaba's IPO might be one of the biggest in history

INDEPENDENT FINANCIAL MAGAZINE VOL.1 EMEA - Europe, Middle East, Africa

Africa’s Bright Future Jeremy Kempke

(c) photo / un.org

O

ver the past years the Emerging Market’s rapid growth in relation to social and business activity has been the main reason for investors flooding into countries like China and India.

Recent events partially correlated with the financial crisis, have resulted in slowing growth to concerning levels. So is there any money to be made? I don’t think so; People tend to forget that (with the exception of Brazil & Russia) annual GDP growth still stands as a multiple of countries like the US or UK. However, what happens when the Emerging Markets become “emerged”?

Let’s take our world’s export champion as an example; China. China has been growing at an astonishingly fast pace for decades and has thus been driving up personal wealth and living standards.

Continuously fulfilling people’s need, naturally results in the manifestation of greed (a natural human trait). This may lead to China eventually having to give up their spot as a manufacturing haven, due to production simply becoming too expensive. I agree that there is still time before this happens, but when it happens where do companies shift their production? The answer is simple; the “next” Emerging Markets – i.e. current Frontier Markets. We can see it happening right now. Chinese

(construction) companies piling into places like Tanzania, Angola or Zambia to position themselves well for the eventual boom.

This brings us to the actual topic of this article; Sub-Saharan Africa – Growth & Development.

Africa has faced rather tough conditions that has hindered it from becoming the world’s “Super-Power”. Conditions range from civil wars over recurring cases of corruption, to an extensive lack of infrastructure (arguably caused by modern developed countries). That in mind, one can certainly imagine the overall growth potential the continent has. A recent drastic increase in confidence and growth in Sub-Saharan infrastructure, as well as improved political and macroeconomic stability has certainly proven it’s potential. South Africa, in particular, is pioneering Africa’s economic growth by generating 2/3 of the continent’s Investment Banking fees. Even though these fees aren’t momentarily competitive, one can observe a massive growth all over Africa.

Exemplifying this, the volume of Africa’s targeted Mergers and Acquisitions reached US$20bn in the first half of 2013, up 30% year on year.

Does this seem too distant? Britain isn’t involved in it? Let’s look at one of the UK’s biggest banks. Barclays has recently started moving business (majorly Retail Banking) into Africa, similar to China, positioning itself well for the impending change. However it is not just Barclays that is currently daring the step; Standard Bank, BNP Paribas and Blackrock amongst others are considering this option.

Even though putting money into Africa is anything but a risk-free and short term process, the potential profits could be immense.

In the words of Barry Doran (Regional Finance Director – G4S Africa): “Banking in Africa is similar to solving a Rubik’s Cube. On a first glance it seems like a sheer impossible task, but turning it around and looking at it from different angles can be highly rewarding.”

Without risk, there is no reward.

INDEPENDENT FINANCIAL MAGAZINE VOL.1 EMEA - Europe, Middle East, Africa

Scottish independence : Part2

Uncertainty of financial institutions Why would they leave Scotland?

Alan Konopka

A

fter a long lasting debate regarding the Sterling-area, the UK chancellor George Osborne publicly announced that he would reject an independent Scotland’s request to keep the pound.

In addition to that, the UK treasury chief secretary, Danny Alexander, gave a speech in Edinburgh where some issues concerning the independent state of Scotland were clarified. According to Danny Alexander, pensions and other financial products would rise in price in the event of independence.

The opposition and Alex Salmond responded by saying that although the Scottish government proposes to continue to share the UK Pension Protection Fund, a separate Scottish fund could be created.

As the “Yes” and “No’ campaigns gain momentum and the referendum date is closing we need to think what would happen to our (Scottish) financial institutions such as Lloyds Banking Group or the Royal Bank of Scotland.

According to European legislation, banks should be regulated in the country where they have most of their operations. It is unfortunate that most of the operations

of those two banks are in England, Wales and Northern Ireland and therefore would most likely see the headquarters being moved from Edinburgh to London. If that wasn’t enough, just last week, the chief executive of Standard Life warned that in the event of Scotland gaining independence, Standard Life would consider leaving Scotland as there would be more business for the firm in England. One can dwell on those issues endlessly. There would be however a very painful and significant outcome of such events as both RBS and Lloyds employee thousands of Scottish residents in their divisions in Scotland.

That implies that such an operation would leave countless people jobless and hence depress the economy even further.

Without the main banks being part of Scottish industry, Edinburgh would lose its importance as the second main UK financial hub after London.

That would force the hand of many investment, private wealth and asset management firms to relocate to other locations that are cheaper than London.

This would also impact employment within the financial sector as more than

148,000 people in Scotland either work in financial institutions or other related services.

As the referendum draws nearer, the degree of uncertainty over the future of an independent Scotland increases. There are many questions to which the Scottish National Party has no clear and frankly precise enough answers, but rather a case built on emotion and dreams.

At the end of the day, the vote has to be made upon sound economic foundations and upmost analysis from the various parties involved. It’s no surprise that many financial and non-financial institutions have reported a chance of moving down south in the event of independence.

Those companies make long-term plans and predictions upon which strategy is established. If there were uncertainty in regards to either currency, legislation and regulations, then companies such as RBS, Lloyds, Standard Life or Shell would rather leave Scotland than get involved in a political, emotional scheme.

INDEPENDENT FINANCIAL MAGAZINE VOL.1 Asia-Pacific

Japan Economic Condition The equity market in normal times provides a good indicator of economic health. 2013 was a magnificent year for the Nikkei 225 index, so understandably you might say a correction was on the cards. The topix YTD has dropped 7% and MoM has fallen 100bps. Is this just a case of profit taking rather than a wider risk off theme? The former is the likely option due to corporate earnings set for a spike in the right direction.

(c) photo / japantimes.co.jp

Abe is the man to kick start Japan Pete McCarthy

W

ith Japan currently talk of the town, will Shinzo Abe’s master plan be the key to unlock growth and longer-term prosperity. If I knew the answer to that question, I would be in Tokyo working with the LDP. Mr. Abe himself has made quite an impact for the Japanese people. His economic policies in terms of critical structural reforms are starting to show signs of promise. Just last week their flagship Investment Bank, Nomura, hired a woman to run the banking arm.

Amongst getting more of an even balance in terms of gender in the labour force, reducing the corporate tax rate is a must to promote economic growth. If Japan gets its fiscal house in order is that a case of job done?

To say monetary policy is loose in Japan would be like saying Alan Konopka gets decent grades. JGBs yield next to zero and with inflation on the rise, negative returns are a common theme. With liquidity in abundance, the yen has experienced a significant depreciation, especially given the counter policy decisions taken across the pacific.

Over the last 12 months the yen has fallen by around 20% against the greenback. It’s no surprise then the major beneficiaries are Japanese corporates. More revenue per sale means greater profits. The non-financial sector has not been this profitable since the beginning of 2010.

But what are the headwinds to the master plan?

Let’s not forget, the weakening yen can only go on weakening for so long and with the Eurozone not recovering substantially anytime soon, Japan may be set for a correction. Consumption tax rises are not welcome to stimulate domestic demand and with the majority of bond holdings by the private sector, will they be able to keep a lid on the 60bp rates?

Debt to GDP ratios have been a topic of much discussion by a number of economists and Japan is up there with the largest percentage. In previous articles I have argued it is due to the ability to pay debts with the push of a button. A headline figure of 200%+ of debt would put many a country on an unsustainable path, leading further and further away from capital market city.

But making the relevant adjustments and calculations, this figure turns out to be a more respectable 60%. The excessive figure is a gross measurement, while the much lower number is the net debt from the private capital market.

Going forward, Japan is on the mend, but the results will not be entirely visible in the coming months. Long-term sustainability stems from planting longterm seeds via the labour market, free trade agreements and tax rates to name a few policy initiatives.

The master plan is in its infancy, but one thing’s for sure; Abe is the man to kick start Japan.

INDEPENDENT FINANCIAL MAGAZINE VOL.1

The Chinese Credit Check

The dreaded word for debt investors, default.

Pete McCarthy

‘C

hina’ and ‘default’ have, until now, been poles apart. Shanghai Chaori Solar however broke that trend of zero corporate defaults on Friday, leaving investors unhappy and pondering their next move.

Now by itself, this may not seem like a surprise. A lack of demand resulted in the company not being able to make the coupon payments. That situation can happen to any company, right?

The question is though, is this just the tip of the iceberg for future Chinese debt?

In many ways this is not the correct question to be posing. If Chinese defaults were a regular occurrence that would create an atmosphere of prudent borrowing, which one would argue is a positive. Unlike the word default, overcapacity has been synonymous with Chinese firms in recent years. The stateowned banks are the major catalyst for credit fueling and the notion goes, that if the company finds itself in trouble, the

local government bails them out.

That has created the reverse of prudence and encourages risky behavior. Sound familiar? When demand is there, leverage is your best friend. When demand is not there, leverage is your worst nightmare.

Chaori was left to default in true capitalist fashion. So have times changed with regards to government attitudes towards emergency funding? The same could be said of the PBOC in the way they control interbank rates. Perhaps this is not a case of government philosophy’s, rather the fact that local governments are already themselves in deep debt pools and can’t actually afford to bail out companies.

Local Chinese government revenue comes primarily from land sales. Land is a finite source so an alternative source of funding is needed.

The caveat to that argument is, in reality, if a local government were to default, the state owned banks would delever

the local government but would lever up centrally. Such crisis averting actions is last resort but last resort over time, given the ticking time bomb on many local institutions, may be the first resort.

Panic, what panic?

CDS on Chinese sovereign debt fell 6bps.

The overall bond market failed to bat an eyelid at the news. In fact risk premia has been continuously baked into the price, sending the spread on high and low yield to diverge.

Whatever the outcome, Beijing has sent a clear message. The upcoming 12 months will make US treasuries look safe as houses.

INDEPENDENT FINANCIAL MAGAZINE VOL.1 Finance in Sport

The BIG Tax Case Kristopher Connelly

O

n the 20th of November 2012; one of the most important decisions was made in the history of tax law. For it was the day when the former holding company of Rangers Football Club (oldco) was declared not guilty of the misuse of an Employees Benefit Trust (EBT) tax avoidance scheme. Although this decision has been appealed and this case seems far off from being considered finished, one must consider what the implications would be for HMRC to lose such an important case.

(the beneficiary), in the form of interestfree loans. Since these loans aren’t contractual they are not be subject to Tax or National Insurance Contributions.

Employees do have the option to refuse such payments and the vast majority of the loans are never repaid.

Throughout this article and others to follow I am going to inform you of how this case all started, what the implications were for Rangers Football Club and conclude with the possible outcomes and how this could affect the future of tax law.

For Rangers Football Club, the use of EBT’s was set up in 2001 after discussions between former owner of Rangers David Murray and Paul Baxendale-Walker. Paul Baxendale-Walker is a former lawyer who also advised companies on how to implement and run different tax schemes.

Between 2001 and 2010, Rangers and David Murray invested between £40-50 million into the trust which was paid out to 111 employees of Rangers; including playing staff, Directors and other staff.

Let’s begin with what an EBT is. An Employee Benefit Trust involves two parties, the “trustee” and the “beneficiary”.

The trustee pledges money into the trust which is then reimbursed to employees

In 2008, HMRC made amendments to legislation in an attempt to tighten the restrictions on those companies using EBT’S. HMRC has the right to request money from historical tax avoidance

schemes (going back 7 years), which break legislation from the date of implementation.

HMRC sanctioned the bill to Rangers because they felt that Rangers usage of EBT’s was on a contractual basis. They collated evidence of such agreements in e-mails and other documents. Therefore in 2010, HMRC ordered Rangers to pay a bill of £49 million for their usage of the scheme from 2001 - 2010 plus interest.

Rangers’ oldco refuted these claims and claimed that everything was done legally.

This began one of the most defining moments both in tax legislation and Scottish Football. In the next article I will discuss what happened at Rangers Football Club between 2010 – 2012, and HMRC’s role during that period.

HWUTIC Updates Incoming events: Main Meetings (Thursday): 13th March 2014 – Tech Debate! Social Networks: Boom or Bust?

20th March 2014 – Alan & Pete: Are derivatives really weapons of mass destruction?

27th March 2014 – HWUTIC Talks: Guest Speaker Cameron Millar – FX Derivatives Trading 3rd April 2014 – Annual General Meeting (HWUTIC AGM)

Social Events: 13th March 2014 - HWUTIC Casino Night Out