BusinessDay 20 Jul 2017

Thursday 20 July 2017
@ FINANCIAL TIMES LIMITED 2015
Central bank
mis-steps
raise concerns
MEHREEN KHAN
Investors are increasingly
concerned over mis-steps
in global monetary policy,
propelling central banks to
the top of market risks this month,
according to a major survey of
money managers.
A shift in communication from
the European Central Bank in recent
weeks has driven the euro to
its highest level in 14 months and
prompted a sell-off in eurozone
bond markets, as investors adjust
to the prospect of a scale back in
emergency stimulus measures.
In a sign of the new found unease
over central bank policy, just
under half of fund managers surveyed
by Bank of America Merrill
Lynch (48 per cent) thought global
monetary policy has become
“too stimulative” for a brightening
world economy - the highest
proportion since April 2011.
The change in sentiment
comes after the ECB’s shift in its
communication over the path
of its bond-buying programme.
Investors will be scrutinising its
last major policy decision before
the summer break today, when
China has slashed the
price of dozens of top
drugs from multinationals
such as Roche,
GlaxoSmithKline and AstraZeneca
by as much as 70 per cent as
a condition of adding them to a
government health insurance
scheme.
Thirty-six drugs, mainly developed
by overseas companies,
will see average cuts of 44 per
cent to last year’s retail prices,
making them cheaper in China
than “neighbouring regions”, the
social security ministry said in a
statement.
The move makes the medicines
eligible for state co-payment,
which pharmaceutical
companies and analysts say will
bring the products within the
reach of more people, boosting
overall sales.
China, the world’s secondlargest
pharmaceutical market
with sales worth $117bn in 2016,
is crucial for multinationals.
The cuts, following lengthy and
sometimes bitter negotiations
with Beijing, underline how the
world’s biggest drug companies
FINANCIAL TIMES
COMPANIES & MARKETS
the governing council gathers for
its July meeting.
Mario Draghi, ECB president,
roiled European markets last
month when he hinted at a tightening
in the central bank’s quantitative
easing programme, which
has been running since March
2015. Draghi cited the eurozone’s
broad-based recovery and steadily
falling unemployment rate as reasons
for optimism, even as inflationary
pressures have remained
subdued.
Eurozone inflation remains below
the ECB’s target of just under 2
per cent at 1.3 per cent in June. But
over three-quarters of investors
surveyed said they expect higher
inflation in the single currency
area over the next 12 months.
The prospect of an ECB tightening
has sparked a correction in the
bond market. Germany’s 10-year
Bund yield has more than doubled
to 0.56 per cent in the past month,
while the euro has surged to its
highest since May 2016.
Bond yields, which move inversely
to prices, rise on the prospect
of tighter monetary policy
through higher interest rates or a
withdrawal of QE.
Beijing slashes western drug prices
before inclusion in insurance scheme
TOM HANCOCK & WANG XUEQIAO
are co-operating with the ruling
Communist party’s drive to
reduce medicine prices even
though it has slowed revenue
growth for some products.
Most of the 36 drugs targeted
in the latest negotiations are still
under patent protection.
Reductions for drugs treating
cancer - an increasing portion of
China’s disease burden - were
particularly deep. The price of
Roche’s breast cancer antibody
Trastuzumab will fall 67 per cent
compared with the average price
last year, while the price of its
lung-cancer drug Erlotinib will
be cut by 58 per cent.
Prices for two drugs used to
treat breast cancer, AstraZeneca’s
Fulvestrant and GSK’s
Lapatinib will fall 56 per cent and
41 per cent respectively. Bayer’s
liver and kidney cancer drug
Sorafenib will be halved in price.
“These are drugs which treat
common diseases, and it will
be no problem to achieve largescale
sales. Some are close to
patent expiration, and by lowering
their price now will be able
to fend off competition more
easily in future,” said Joe Jin, a
healthcare industry partner at
consultancy Roland Berger.
THOMAS HALE
High-yield bonds and
non-performing loans
are not the most obvious
of combinations.
So when private equity group
AnaCap launched a €325m highyield
bond this month to help buy
bad debt, it caught the attention
of investors.
The deal, priced at a yield of
roughly 5 per cent, was issued to
fund purchases of NPLs in Italy
and Portugal, giving a new set of
buyers exposure to Europe’s most
pressing financial conundrum.
Europe’s €1tn non-performing
loan problem is at a critical point.
Last week, EU finance ministers
made new recommendations to
speed up the development of a
market for the debt.
But the market has evolved of
its own accord. Last week, Bain
Capital announced new deals in
Spain and Portugal. On Monday,
UniCredit finalised a sale of bad
In association with
Japanese corporate issuers attract record sums
amid regional boom in dollar bond sales
Japanese companies have
tapped bond markets for
record amounts this year,
taking advantage of investors’
continued demand for yield amid
a boom in the region’s dollar debt
markets.
So far this year $195.3bn of yen
and dollar-denominated bonds
have been sold, according to Dealogic,
10 per cent more than at the
same point in 2016. The previous
year-to-date record was $187bn
in 2012.
A rise in sales of dollar bonds
has driven the boom. The $59.8bn
sold is almost twice that of five
years ago - a trend echoed across
C002D5556
loans to Pimco and Fortress.
“We’re seeing increases in balance
sheet allocation to the asset
class among particularly the US
banks,” says David Edmonds, of
Deloitte.
While private equity and credit
firms make up the bulk of demand
for portfolios of bad loans, they
also typically raise financing from
investment banks but also from
bond markets, as with the AnaCap
deal, in a bid to boost the profitability
of their investments.
Funds have raised $300bn in
capital, Deloitte says, and the
amount of potential financing
could be even higher - creating a
vast market of which banks and
lenders may gain a share.
Big US investment banks, including
Citi and Morgan Stanley,
are seen to be eyeing opportunities
for growth in financing
Europe’s NPL market, taking advantage
of the challenges facing
the domestic European banking
sector, according to bankers and
the region.
The dollar boom has prompted
debate over whether it marks a
maturing of Asia’s international
bond markets or is a fad that will
fade when interest rates rise definitively.
The region’s bond markets
are historically far smaller
and more fragmented than those
in Europe and the US.
A bond sell-off, pushing borrowing
costs higher, has not
deterred corporate borrowers,
however.
Last week SoftBank, the large
telecoms to technology group,
sold $4.5bn in junk-rated perpetual
bonds - a global record for
such an issue.
Bankers are confident the
BUSINESS DAY
US banks eye European non-performing loans
Mario Draghi
PETER WELLS & JENNIFER HUGHES
A3
analysts.
“The US banks . . . are among
the most keen to lend right now,”
says Justin Sulger, head of credit
at AnaCap. “ Obviously the European
banks are still going through
greater restructuring . . . It’s a big
growth opportunity.”
Lending against NPL portfolios
provides banks with a form of indirect
exposure to the asset class,
with attractive earnings in an
otherwise low-yield environment.
In peripheral Europe, the loans
banks provide to buyers of NPLs
typically earn them a spread of 4
per cent over the benchmark rate.
Investors and financiers are
looking for the next set of opportunities.
Ireland is seen as
an active source of NPL activity,
while the failure of Banco Popular
and its purchase by Santander is
expected to generate significant
NPL business in Spain. Popular
had masses of toxic real estate
loans that Santander is now expected
to sell.
trend can continue at least a few
more quarters given that Japanese
companies’ interest in overseas
acquisitions is expected to continue.
“ Japanese corporates in the
past relied on bank loans for dollar
funding,” said Ryota Suzuki, cohead
of Japan debt capital markets
for Bank of America Merrill Lynch.
“But their funding needs are getting
bigger and bigger.”
They therefore needed to raise
money in the market, he said.
“Japanese issuers are very active
in expanding internationally and
they will also have some refinancing
needs. I think for at least a
few more years, this trend will be
continuing.”