Telecom operators will drive and shape the growth of the sharing economy and the fintech revolution says Frank Sixt, group finance director and deputy managing director of CK Hutchison Holdings.
This is one of the conclusions Sixt comes to in a special interview below to mark FinanceAsia's 20th anniversary this July.
As part of our anniversary celebrations we interviewed a series of leading figures that have shaped Asia over the past 20-years. Sixt also looks forward to the next 20-years, predicting a future in which artificial intelligence (AI) will fundamentally alter the way humans conduct their daily business.
Sixt is one of the region's longest-standing and most influential finance directors, having first come to Asia as a lawyer in 1983. He became finance director of Hutchison Whampoa in 1988 after getting to know chairman Li Ka-shing through his legal work in Hong Kong.
Since then, Sixt has been responsible for establishing many of the region's fixed income benchmarks as the bond markets rapidly evolved following the trauma of the Asian Financial Crisis. The CK group is also famous for initial public offerings, which always seem to reflect the particular zeitgeist of the time.
Here Sixt also explains how he thinks a company can execute a successful capital markets transaction.
You’re one of Asia’s longest standing CFOs and have pioneered many transactions over the years. Which ones stand out?
Yes, I’ve been here so long I’ve become part of the wallpaper!!
My all time standout transaction is a recent one: the group reorganisation we completed last year, which created CK Hutchison Holdings and CK Property. It was a world-class transaction by any measure and tested the limits of anything that had been done in this part of the world before, particularly from a securities and regulatory point of view.
The biggest hurdle was trying to keep such a complex restructuring simple so it didn’t start fraying around the edges. In regulatory terms it was a takeover, but in reality it was a merger of equals involving a business combination, two schemes of arrangement and a spin-off all in one.
Just trying to make sure we didn’t trip up over any of the covenants on our debt was a major task. But everyone rose to the occasion and we got it done in a very short period of time. I’ve been incredibly pleased with the value we created.
I was also very impressed by the fact that throughout the regulatory process the transaction remained confidential. Global regulators are sometimes accused of being a leaky ship, but this was kept real tight.
It indicated how far and how professional this part of the world has become.
You became Hutch’s group finance director at the beginning of the Asian Financial Crisis. That must have been a baptism of fire.
Yes, our share price plummeted and bond spreads rocketed. I went to all our relationship banks and asked to borrow money we didn’t really need just to emphasise we had market access.
We also borrowed in sterling to prove the European markets were open even if Asia wasn’t. But I’ve regretted it ever since.
The deal proved a point, but the bond was expensive and landed in about four sets of hands, so we were never able to buy it back. The damn thing finally matured in December last year.
What did the crisis teach Asia?
The risks of borrowing short-term and in foreign currency against long-term assets in local currency. It was the first time short-term foreign currency borrowing came home to roost.
After that, the region began to turn away from short term bank financing and towards accessing global bond markets and seeding the creation of domestic bond markets.
How did it affect your strategy?
Our strategy has always remained the same: go long, keep maturities well staggered, stay over-liquid and take advantage of market opportunities when they present themselves.
Our overall aim is to maintain a financial profile consistent with our single-A credit rating. But that still leaves us with plenty of flexibility. Some businesses require different funding at different stages. For example, during their start-up phases our telecoms business have always been 100% equity-funded.
Whatever we do in our businesses or with our balance sheet needs to meet two tests. Yes, we need to do things that are EPS and CFPS accretive, but everything we do also needs to be ratings neutral, or accretive on a consolidated basis.
You’ve set a lot of bond benchmarks over the years.
Yes, we did Asia’s first euro-denominated bond in 1999. We also did Asia’s first mega bond when we raised $5 billion in 2003.
I remember asking our banks whether they thought we could pull off a single big transaction and they said yes. It was a time when there were a lot of mega bonds globally.
It remained Asia’s largest transaction for a long time. Alibaba gazumped us in 2015. But it’s a different world now.
There’s such a huge flood of liquidity fuelled by central banks. It’s becoming easier and easier to get deals away ….. provided you get your timing right!
We’re seeing a lot of debut borrowers from China these days. What advice would you give them to achieve a good outcome?
I’ve always been a bit infamous for our ‘definitions of success,’ which we put together before each transaction. We clearly define what we expect in terms of size, pricing and aftermarket performance.
We also maintain a flexible fee structure, rewarding banks that outperform and reducing fees for those that don’t. Hopefully that makes us less vulnerable to bait and switch tactics.
My general advice would be don’t get too greedy out of the box. Don’t push pricing as far as it will go particularly given there are a lot of up days and down days in the markets at the moment.
It makes life difficult for investors. Over the longer-term you’ll be rewarded for this when you come back with a new financing requirement.
What kind of ongoing relationship do you maintain with investors?
We don’t do a lot of equity or debt roadshows anymore, although we have done the odd non-deal roadshow. But we do try and accommodate as many one-on-ones as we can, and we've worked very hard on our annual and interim Reports to increase the transparency of businesses' performance.
Our investor base has definitely morphed over the past 20 years as well. Asset managers have got a lot bigger.
There are also more hedge funds, index funds, ETF funds, algorithmic and AI traders. We try and sit down with those who want to take a longer-term view.
You mention AI. How important is this going to be for the financial markets over the next 20 years?
AI and machines are going to become a lot more ubiquitous. We’ve invested in an AI-driven trading platform through Horizon Ventures, which is an early stage technology investor backed by my chairman’s charitable foundation.
There’s going to be a lot more algorithmic and programme trading in the future. It’s hard to say whether it will make markets more or less volatile, but the transmission mechanisms for market events will certainly be different.
Won’t regulators want a person to blame though?
Yes, quite possibly. But this doesn’t detract from the fact that virtual reality will be part of reality in 20-years time.
AI-led interfaces will be everywhere and it’s highly probable customer relations will be handled by a sentient hologram. Look at the ongoing battle between Siri and Google Now and VIV, which is the latest AI assistant from Siri’s creators.
Siri was one of the little companies Horizon Ventures helped to seed.
How about when someone rings customer relations because they’re annoyed? Won’t they get even more irate if they end up with a computer that’s simply been programmed to respond in a calming manner?
I think we’re getting beyond my pay grade now!!! But seriously, holograms are just going to get better and better.
It’s going to be a big sea change and it will alter human behaviour too. You and I could end up attending a rock concert where the same band is playing in multiple locations around the world, but will only be physically present in one.
And that’s one, which everyone will want to be present at, won’t it?
Yes, that will be the one with the premium pricing.
I think the overriding issue is how redundant humans will become when machines get more efficient.
It will become more difficult to earn a living from what we currently consider normal jobs. Yet economies are currently based on humans earning salaries in order to pay taxes and consume goods.
It’s hard to quantify the impact. But it’s clear the fundamental drivers of economies and society are changing. It’s the single biggest shift of our lifetimes.
How can telecoms companies take advantage of this?
When you look at consumer finance, whether it’s insurance, banking, remittance payments, all that stuff, more and more will be originated through mobile devices.
Our industry will become the originator and servicer for the fintech revolution and shared economy.
For example, Horizons Ventures, which I mentioned earlier, has recently invested in a mobile bank in Europe. Clients can set up a bank account in eight minutes and satisfy all the anti-money-laundering requirements.
The bank, called N26, is growing like crazy. Those eight minutes beat an afternoon spent filling in forms!
The sharing economy is also a big factor changing the structure of the economy.
In the past, service providers and clients often never met. Now they might be interchangeable.
One day an Uber driver is a service provider. The next day he or she might be a client of Airbnb and drive there in the same car.
That requires a whole new level of flexibility, particularly from financial service providers such as insurance companies. For example, someone might want insurance for a single Uber cab ride. The easiest way to do that would be on their mobile phone as they book the journey.
Mobile payments have actually been quite slow to take off because the technology has been clunky and inefficient. But we’re almost at a tipping point now and once we reach it these kinds of businesses will scale very quickly.
Where does this leave banks and insurance companies? Will they become completely disintermediated?
No, I don’t think so. They’ll still be managing the risks.
The big story of the previous two decades has been China. What’s your view on how far the country has come and where it’s heading now?
We all need to be bold on China. If China is dysfunctional then the world is dysfunctional.
The country needs to continue raising living standards at a sufficient rate to maintain social stability. It’s at an interesting juncture right now.
There are still elements of a command and control economy, which is creating an internal conundrum. The government wants to broaden equity market participation, but it also wants to tell the market when to stop selling. Not an easy balance to strike.
China has made a very difficult transition in a difficult world and scored some extraordinary successes along the way. The government is clearly working hard to rein in excesses in the economy and has put some good policies in place.
Over the longer-term, China’s biggest asset is on the demand side.
The region will also become more Rmb-focused. This is being driven by trade, the new Asian Infrastructure Investment Bank and the One Belt One Road policy, which will open up Central Asia and change its geography. Lifting neighbouring countries through infrastructure investment is a very good policy.
How important is the Rmb for your business?
We don’t actually do a lot of cross-border business. Our ports handle cross-border trade, but as the owner our operations are dollar-based.
I don’t think the Rmb will replace the dollar. It will be more of a substitution effect.
Will you become active in China’s domestic capital markets?
Well, that’s the thing. They are still domestic and we haven’t been a major player in their development.
The panda bond market is starting to open up and as it does we will become more engaged. But it is still very early days.
CK Hutch now has more assets in Europe than Asia. How worried are you by Brexit and what’s happening across the Continent?
The Brexit vote was the manifestation of a level of discontent that is latent across most societies today, most particularly in Europe. There are simply a lot of people who have not benefitted from the huge rewards globalisation has yielded for society has a whole.
It's a very good thing that the UK seems to have stabilised its parliamentary leadership quickly. As a result, I think for the next six months the focus will not be on the UK, but on events in Europe.
Europe as whole has a disparate array of social and political issues to resolve if it wants to continue moving forwards successfully.
EU monetary policy is under pressure because there’s no fiscal co-ordination. Then there are the social pressures from high levels of youth unemployment and managing refugee and migrant flows in the South. Answers are needed before the pressure cooker explodes.
As a group we are more focused on Northern Europe, where there are less challenges. In addition to our telco businesses, a lot of what we do is about turning on the lights, delivering the gas and the water. These are low risk businesses.
The South has the big challenges.
What’s your view on economists who argue we live in an age of secular stagnation? Will interest rates ever rise?
Central banks appear to be out of gas. Markets are behaving as if they don’t believe central bank pronouncements any more.
It boils down to the credibility of the Fed versus fundamentals. It appears to have a profound desire to restore its credibility and make a statement by increasing rates.
But how many modest increases can the US economy absorb? I really doubt whether it is strong enough to absorb many.
Right now, I don’t see a way out from negative government bond yields.
Monetary policy can only change direction if the West, in particular, implements effective fiscal policies.
This is not about how much tax is raised but how governments spend and raise money more efficiently, and incentivise productive investment from the private sector.
One of the other interviewees for the anniversary special suggested sovereign debt write-offs in the developed world are going to have to take place at some point, perhaps starting with Japan?
Yes, they're probably right. Write-offs have to happen. But it might be Greece, which happens sooner rather than later.
