A SUPPLEMENT TO EUROMONEY – MARKETS 1997: What’s ahead
INA
The Italian government’s long-awaited offering of bonds convertible into stock in the privatized insurance company INA was a runaway success. When the three-day marketing period began on June 19 it was worth $1.3 billion and the bonds offered were convertible into 21% of INA. But such was demand from domestic and overseas institutional investors that within 24 hours the Italian government had virtually doubled the issue. Even then, it was oversubscribed eight times.
The issue was handled by Goldman Sachs and Istituto Mobiliare Italiano. Its success enabled the government to dispose of most of its residual 34.38% holding in the company, taking the sale to $2.1 billion. The bonds were divided into lire-denominated and dollar-denominated tranches (both issued at par). The lire bonds carried a coupon of 7% while the dollar bonds paid 5.5%; both ran to a five-year maturity. Significantly, 60% of the dollar tranche went to convertible-bond specialists, while most of the lire tranche was taken by holders of Italian bond and equity portfolios.
The issue was reserved for institutional investors and some observers took this to be a time and cost-saving measure. While support for this view came with the news that the fee for the issue had been cut to 2% from the traditional 2.5%, there was also a feeling that with a substantial privatization programme ahead, the Italian government was saving the retail market for future sales. If that was the plan, it was vindicated when most of the October sale of 10% of state oil company ENI went to Italian retail investors.
Deutsche Telekom
The Dm20 million ($12.6 million) initial public offering (IPO) of Deutsche Telekom was a campaign without a war; it encountered practically no resistance. Beguiled by the management’s story and panicked by syndicate bankers into placing huge orders in the hope of getting adequate allocations out of a hugely oversubscribed issue, international investors found themselves fighting on Deutsche Telekom’s side.
Deutsche Telekom started trading at Dm33.20, a significant advance on the issue price of Dm28.50. The management, particularly chief executive Ron Sommer, were admired for their astute hustling of the Telekom stock. Sommer got his 15 minutes of fame in the world’s equities markets, but the real test was to come.
One of the cornerstones of Telekom’s sales campaign was to place the issue as broadly as possible. Many investors placed orders because they could not afford to be left out of a stock that would have a weighting of nearly 5% in the German Dax index.
But immediately after the November 18 launch, international investors started selling. In the first few weeks, pent-up demand from German institutional investors kept the share price bobbing at around Dm32 to Dm33. Nevertheless, Telekom underperformed the Dax almost from the start.
By the second week of January the price had begun to slump, with more selling from international investors. It passed the Dm30 barrier and began to get dangerously near the Dm28.50 issue price.
Investors are now asking when they should sell. Some analysts believe France Telecom will be a more reasonably priced substitute when it comes to market in April. And no-one knows whether German retail demand the foundation of the entire deal will be sustained after six months, when Germans can take earnings on equity investments tax-free. The second half of May could be an interesting time for Deutsche Telekom shares.
At the beginning of January the gag on telecoms analysts at the syndicate banks was lifted one which had been imposed on nearly every syndicate bank with the exception of BZW. While all had been euphoric in their last analysis, published in October, a number of analysts have now shifted their recommendations from buy to hold. Goldman Sachs, one of the three global co-ordinators, is saying hold/buy.
But one other barrier was lifted on January 1. Under the syndicate rules, which were monitored stringently by the US Securities & Exchange Commission (since Deutsche Telekom was also listed in New York), underwriting banks were not allowed to support the share price before the end of December. Now that embargo has passed, syndicate banks might feel obliged to help.
Argentina’s $1 billion jumbo
In one of the most successful emerging-market debt issues last year, the Republic of Argentina placed $1 billion of 10-year global bonds in October through lead managers Goldman Sachs and Salomon Brothers. The bonds were priced to yield 11.07% or 445 basis points (bp) over comparable US treasury bonds and were trading at around 380bp in mid January. The issue demonstrated that there was no shortage of appetite for high-yield Latin American sovereign debt.
Heavily over-subscribed, the size of the offering was increased from $750 million. It was broadly distributed among close to 150 investors, including a significant number of non-traditional investors in Latin American securities, with about 85% of the total placed in the US, 12% in Europe, 1% in Asia and 2% in Latin America. Coming after a less successful five-year global issue at the beginning of the year, “it helped set the tone for Argentina (in the dollar sector of the market) and helped redefine the Argentine yield curve,” says a spokesman for one of the lead managers. It was Argentina’s second billion-dollar 10-year global issue. The first was launched at 280bp in December 1993, a year before the peso devaluation led to a general repricing of Latin American risk.
Scania
The biggest IPO in Europe arrived on April 1 as the Swedish Wallenberg family’s holding company, Investor AB, sold 50% of its trucking subsidiary, Scania, raising Skr18 billion ($2.7 billion). The deal briefly was also the biggest IPO in the world it was overtaken two days later by the $3 billion Lucent Technologies flotation.
Scania became the first Swedish company to list on the New York Stock Exchange and the seventh largest stock traded on the Stockholm exchange. The shares performed strongly, the price eventually firming around Skr182.50 ($27.50).
This vindicated the offer price of Skr180 the predicted range was Skr155 to Skr185 set by the three global co-ordinators, Enskilda Securities, Morgan Stanley and SBC Warburg. Their commitment to a top-end price followed a month-long worldwide marketing effort.
The deal had been a year in preparation and some observers suggested that on such a scale, in such a market, it could hardly fail. Worldwide interest was generated and the offering was three times oversubscribed. Some 55% of the offered stock was sold outside Scandinavia 25% into the US market, 20% to the UK and Ireland and 10% elsewhere. Investors were allocated equal numbers of A and B shares carrying one and one-tenth voting rights respectively.
There was surprise in the market when, after the deal, the Investor AB share price came under selling pressure. Analysts’ expectations had been for the two prices initially to move together. A mature reading of the movement pattern suggests, however, that the Wallenberg family has moved more value to the open market than perhaps at first it realized.
Telefonica del Peru
It was Latin America’s biggest cross-border stock offering since 1993. Last July, the Peruvian government raised $1.2 billion by selling 26% of the national telephone company, Telefonica del Peru, to investors around the world. Joint global co-ordinators JP Morgan and Merrill Lynch won plaudits for their preparation and execution of the deal, which brought the first non-financial Peruvian company to the New York Stock Exchange, joining compatriots Banco Wiese and Credicorp.
All told, the government placed 600 million shares with about 290,000 investors, most of them small domestic retail buyers. By value, however, the flotation raised 48% of the total amount from US investors, 26% from other international investors and 26% from domestic retail and institutional investors. At the time, the issue represented 12.5% of Peru’s total stock market capitalization.
The offering was priced at a 2% discount to the market price in Lima, to compensate for a run-up in price during the roadshow, or $20.50 for each American depositary share (ADS), representing 10 underlying shares. At that level, investors were paying $3,985 per line, then the highest valuation in Latin America, ahead of $3,531 in Chile and $1,979 in Brazil. Nevertheless, the offering was heavily oversubscribed, reflecting the low telephone penetration rate in Peru and the attractive potential growth prospects.
The ADSs traded as high as $24.375 before the Peruvian stock market tumbled when rebels occupied the Japanese ambassador’s residence in Lima in mid December and staged a prolonged hostage crisis. By early January, they had climbed back to about $19.75 from a low of $17.50, outperforming the market as a whole. The government still owns 3% of the company, which it is expected to keep. Telefonica Espana owns 31.5%, which it bought in 1994 for about $2 billion.
Repsol
One of the biggest missed opportunities of 1996 must have tempered the elation of joint co-ordinators Goldman Sachs and Banco Bilbao Vizcaya at the phenomenal success of the Repsol placement. The level of interest made it clear from the outset that the Spanish government could have easily disposed of its remaining 21% stake in the oil-to-chemicals group but the government insisted on retaining 10%. Against a background of demand levels more appropriate to a hot bio-tech IPO, this seemed a little perverse.
All main tranches, domestic, UK, US and continental Europe, were heavily oversubscribed, continental Europe by 15 times. The full over-allotment was exercised on all tranches and at Pta4,335 ($31.20) per share the placement raised over Pta140 billion, more than Pta10 billion above the original expectation.
The domestic tranche was sub-divided between retail and institutional investors. The far higher allocation for retail investors (15.25 million as opposed to 2 million for institutions) was thought by some as a reward for loyalty shown in previous Repsol offerings. As a further incentive retail investors were offered a 4% discount on the purchase price, with a promise of a further 10% off should the Repsol share price be below the issue price after 12 months.
After some rocky moments in 1996, attributed by many to the overhang effect of the government’s 10% retention, it doesn’t look as if there is much risk of the underperformance discount being called. The share price ended the year just below the Pta5,000 mark.
China’s $1 billion global
June 1996 marked the successful return to the global markets of the People’s Republic of China, as Morgan Stanley and CSFB raised $1 billion in two transactions coming within days of each other.
“China’s huge foreign-exchange reserves meant that it did not need to borrow,” explains Morgan Stanley’s Iain Hardie, who has since returned from Hong Kong, where he was executive director of debt capital markets, to London, where he’s joined the high-yield team. “Rather, the issue was that of a sophisticated borrower wanting to use its position to enter the market for other reasons. The aims of this deal were to keep China in the global market and to broaden the investor base in Europe.”
While Chinese corporations have been active in Europe, especially in Deutschmark-based paper, the ministry of finance, which acts as China’s sovereign borrower, had preferred instead to tap the US and Japanese markets. This issue, in Europe aimed especially at the UK market, was to introduce China as a sovereign credit to a new range of investors.
The story sold to potential purchasers was the turnaround in the Chinese economy where credit tightening has reduced inflation without sending the country into a tailspin, opening prospects for a credit relaxation. It was clearly an easy sell, the underwriters being aided by the borrower, which sent well-briefed senior people to the roadshows.
Originally on offer was a $700-million five-year bond. “But the issuer maintained a flexible approach during the process,” says Hardie, “and thanks to a rally in the markets, when it became apparent the ministry would be able to get a yield it liked for a longer-dated issue, we decided to use the momentum that had been built up on the five-year [bond] to add $300 million in a 10-year tranche.”
Petronas
Few 1996 issues better illustrate Asian strength than that in October by Malaysia’s Petroliam Nasional Berhad (Petronas): at $1.9 billion it was the second-largest corporate global issue ever.
The transaction was led by Salomon Brothers and CSFB. “We had three goals for the transaction,” explains Stephen Roberts, managing director for debt capital markets at Salomon Brothers in Hong Kong. “Of course, in general terms, we wanted to achieve cost-effective funding. We wanted to build on the investor base in the US and we wanted to establish a European investor base.”
Petronas, rated A+/A1, is often talked about as Asia’s best corporate credit. Its two yankee issues in 1995 had given it a mature access to the US markets. Its outstanding issues trade more like those of an AA credit. The underwriters and the borrower knew that the reception to a global would be favourable. Initially, a two-tranche five- and 10-year bond in the region of $1 billion was planned.
Investor response during the roadshow was overwhelming. “Not only was there enthusiasm for the proposed tranches but we began to receive reverse enquiries in the US for a 30-year tranche,” says Roberts. “The prospect of adding a 30-year, to make Petronas the only Asian credit with liquidity across the yield curve up to 30 years, was naturally very attractive.”
In the end, the transaction came out in three tranches: a $600-million 5-year, an $800-million 10-year global and a $500-million 30-year yankee. The enthusiasm of investors allowed for tight pricing, the respective yields over US treasuries coming in at 38bp, 57bp and 85bp.
