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ASIA
Best Equity Deal
Winner: Korea Telecom
Type of deal: ADS follow-on
Amount: $2.242 million
Date: June 27 2001
Bookrunners: UBS Warburg, Morgan Stanley
| Marcus Brown | ||||||
Following the flood of jumbo issues that came out of China in 2000, Asian equity issuance in 2001 had a lot to live up to. It started well enough. In February, the by now infamous CNOOC, one of China’s oil corporations, came to the market in its second attempt at an initial public offering. Salomon Smith Barney, which took much of the blame for CNOOC’s previous failed IPO attempt in 1999, could only look on as CSFB and Merrill Lynch successfully got the deal away and took the glory.
The fifth-largest IPO from China to date performed well in difficult market conditions and can lay claim to being the best-performing $1 billion-plus IPO globally in 2001. Since listing it has outperformed the Hang Seng index by over 30%. But the China market lacked the follow-through and failed to deliver anything else. “China has a long-term approach,” explains Marcus Brown, UBS’s director of equity capital markets,” and if they don’t think the scenario is right then they don’t push it.”
It was the same story across the region. Singapore sat tight, refusing to enter an uncertain marketplace where valuations and prices were pushed downwards. And apart from a flurry of activity in Taiwan’s equity-linked market in February, its market was also quiet.
Korea, however, went against the trend. In 2001 it originated seven major equity transactions. In December, Korea Telecom came to market with a $1.3 billion convertible. Before that was KDIC’s $500 million exchangeable bond. So, perhaps not surprisingly, with other equity markets moribund, Asia’s equity deal of the year emanated from Korea: Korea Telecom’s $2.2 billion ADS offering.
The deal was the largest equity transaction out of non-Japan Asia in 2001. Its significance goes well beyond its size. In effect it kick-started Korea’s sluggish privatization process. Korea’s last such deal, steel company POSCO’s $292 million offering, was way back in October 2000.
The Korean government was vocal about its intention of selling a 17% stake in KT before the end of the year. It meant a tough timetable for bookrunners Morgan Stanley and UBS Warburg. From winning the mandate to execution was 10 weeks.
To execute a telecom deal effectively when, in the words of one banker, the global telecoms sector stank, was impressive. But it also followed hard on the $1.3 billion Hynix transaction. Hynix’s offering had plummeted 12.9% below the offer price, despite generous pricing. It could have left foreign investors wary of Korean paper. “Did Hynix wreck the transaction? No it didn’t. Did it upset investors? Yes it did. And so we had to work hard to dispel people’s fears. It required a little more leg work to get the deal done,” says Brown.
The pricing was tight. The Korean government made it quite clear that KT was to be sold at or above parity to ordinary shares. The offering on the day was priced at a 0.4% premium, the first transaction from Korea priced at a premium since 1999. And the bid stayed global, 65% went to the US, much more than was expected.
“It showed that investors still wanted to play Korea,” says Jon Foutts, Morgan Stanley’s head of ECM. It can’t be denied, though, that lack of supply from the rest of the region played its part.
Chris Cockerill
Best structured finance deal
Winner: Samsung Capital Co
Type of deal: Secured FRNs
Amount: $200 million
Date: March 29 2001
Sole arranger: ING Barings
| Kevin Lam | ||||||
For the Asian securitization market, 2001 was a year of growth. Total volumes of cross-border issuance were $2.74 billion, 67% up on 2000 and the most to come out of Asia since the financial crisis.
The upward trend will continue as such countries as Malaysia and Taiwan attempt to reform regulatory frameworks to enable development of their own securitization markets. Estimates for 2002 for cross-border issuance are $3 billion.
But for 2001, it was Korea again that provided most activity and volumes. Of the 10 cross-border transactions, Korea can claim seven – 84% of total issuance. On top of this, Korean consumer finance receivables made up 54% of the total Asian volume. The impressive growth rate of the Korean market was helped by the return of the monoline insurers, the AAA rated guarantors of deals.
“If you look at the offshore issuance out of Korea prior to the first monoline deal being done it was insignificant. So one benefit of having them back is much larger volumes,” says Kevin Lam, ING Baring’s director of the Asian securitization group. With the emergence, also from Korea, of the securitization of consumer receivable assets, Lam is extremely optimistic for the region’s prospects in 2002.
The deal of the year is Samsung Capital’s $200 million secured floating-rate note. Although much smaller than Samsung Card’s $500 million deal, also led by ING, Samsung Capital’s deal stands out because it was Korea’s first cross-border securitization transaction backed by auto loan receivables. The deal was triple-A rated by Moody’s and Standard&Poor’s, with Financial Security Assurance providing the guarantee. It was the first time a Korean originator had received the top rating.
ING Barings introduced a revolving structure to the auto loans, allowing Samsung Capital to make new loans from the collections on existing receivables. In effect it meant the note maturity could be stretched out, allowing the company to obtain medium-term funding for what are relatively short-term assets.
CC
Best M&A deal
Winner: UOB acquisition of OUB
Amount: $5.8 billion
Date: June 29 2001
Advisors: Merrill Lynch, Morgan Stanley
| Kalpana Desai | ||||||
M&A activity was down about 40% on 2000 in Asia. Asian companies were jittery following the loss of confidence in the US economy. It also meant US corporates were unwilling to spend in Asia. But while the telecoms and technology companies were forced into hibernation in the US and Europe, there was substantial activity in the Asian TMT sector.
In October there was Singtel’s acquisition of C&W Optus. Weighing in at $10 billion, it changed Asia-Pacific’s record books. The deal is Australia’s largest takeover to date and Singapore’s largest ever M&A transaction. It can also lay claim to being the second-largest M&A deal from the Asia Pacific region.
The M&A deal of the year stays in Singapore, but in the finance industry. For months the Singaporean authorities had been talking about the need to consolidate the state’s banking sector, but with little success. It appeared that the Chinese family-owned banks would never reach agreement. But following OCBC’s aggressive and unsolicited bid for Keppel Capital, the Singaporean banking landscape experienced upheaval in just under a month. OCBC’s move was followed rapidly by UOB’s acquisition of OUB.
Many believe that OCBC’s $2.9 billion unsolicited bid for Keppel Capital was the spark that lit Singapore’s consolidation process. OCBC’s financing, led by UBS Warburg, also deserves attention. The triple-currency bond issue is one of the largest bond issues out of Asia. However, according to rumours, the recent resignation of OCBC’s CEO, Alex Yaw, suggest that not all goes well at the new banking entity. Those in the market suggest that OCBC’s primary shareholder was actually unhappy with the increased price it had to pay for Keppel. Some also question whether the structure of the bank has actually changed. It is, after all, only the third-largest bank in a still overbanked market and lags behind both UOB and DBS. So in terms of importance, the deal was definitely significant but not revolutionary.
The best M&A deal out of Asia for 2001 was the UOB/OUB transaction, with Merrill Lynch, led by managing director of M&A Kalpana Desai, advising UOB and Morgan Stanley helping to fight a rearguard action against the threatening DBS, while at the same time letting UOB through the door. In the opinion of a market watcher: “If you were writing a movie script you could definitely get your OCBC-Keppel made, but it wouldn’t draw the crowds. But the OUB-UOB deal would not only draw the crowds, they’d go back and see it a second time,”
Wee Cho Yaw, the chairman of UOB, surveyed the banks in Singapore and, in his words, wanted to marry the prettiest bride, OUB. Even so, UOB still had to take on the might of DBS Bank in what proved to be Asia’s first publicly contested bid. With 10-year subordinated bridge funding UOB was able to put in a submission 50 cents above DBS’s bid, with a 42.2% cash offer underpinning the deal, compared with DBS’s 12% cash offer. On September 1, UOB’s offer for OUB turned unconditional as over 90% of OUB shareholders accepted the bid. The transaction led to the creation of the biggest bank in Singapore.
CC
Best Investment Grade Bond
Winner: Singtel
Type: Global bond
Amount: $2.3 billion
Date: November 2001
Lead managers: Goldman Sachs, Salomon Smith Barney
| Steve Roberts | ||||||
One deal stands way above all others in Asia’s debt markets: Singtel’s extremely successful $2.3 billion global bond three-tranche offering in November. Singtel was able to raise $1.35 billion in 10-year dollars, $500 million in 30-year dollars and e500 million ($440 million) in five-year euros. The offering was Asia’s largest corporate bond deal ever, and in volatile markets just recovering from the shock of September 11, was incredibly well received.
Singtel came out just after Optus had launched 2006 and 2008 bonds, and AT&T’s $2.75 billion transaction, both of which entered the Asian investor base. Would the Asian bid be able to soak up any more?
There was also the challenge of taking another telecom to the debt market and whether it would be priced closer to global telecoms rather than being viewed as a very strong Asian corporate. But Singtel, Goldman and SSB had little to worry about. At the time of pricing, the order book had grown to an unprecedented $18 billion as international investors began to show more interest in Asia. But the fact that the deal was so oversubscribed does raise the possibility that it was too cheap. Ironically, at one point, as the price was tightened the book got more padded, with some investors tripling their order size.
It was an indication that the market knew the deal was going to be strong. “We kept pushing the market and it kept following,” says Steve Roberts, Salomon’s head of Asian fixed income. Its subsequent secondary spread performance suggests the pricing was right, and the tightening that did occur was more to do with the substantial trade-off in US treasuries than a change in price in the bond.
CC
Best high-yield corporate bond
Winner: Kia Motors Corp.
Type: Five-year FRN
Amount: $200 million
Date: July 2001
Sole bookrunner: Credit Suisse First Boston
The best high-yield corporate bond goes to the first non-public high-yield bond from a Korean corporate. And not only that, it came from a company, Kia Motors, that was bankrupt in 1998.
The challenges of getting the deal to the market were numerous, not least the fact that corporate’s historical financials were definitely lacking. “It was an extremely tough sell,” says Carsten Stoehr, CSFB’s head of debt capital markets. “We had to spend a lot of time in investor workshops getting them up to speed on the credit.” CSFB was also locked in time-consuming negotiations convincing the ratings agencies that Kia was a BB story rather than the BB- that its rating implied.
At launch in July, the issue was two times oversubscribed. The Asian bid was strong again, with 75% of the paper staying in Asia. US investors took 17% and the rest went to Europe. The deal was priced closer to a BBB level, 30 basis points lower than the US BB high-yield index. Its after-market performance was also satisfactory. The bond never went above the offer spread of 470bp over US treasuries. And at one point it fell as low as 395bp.
But what makes this deal so significant is that off the back of this, other Korean corporates were encouraged to come to market. From when the Kia deal was launched in early July a further $2.3 billion of corporate debt came out of Korea up to December.
CC
Best loan
Winner: Haitai Food Products
Amount: $200 million
Date: September 2001
Arrangers: JPMorgan, Cho Hung
The loan business across Asia was tough, with volumes dropping around 25%. As interest rates fell and competition increased among the banks, margins were put severely under pressure. Alongside this, blue chips across the region were able to demand tighter pricing.
“It’s very competitive and you can’t always make enough money to support the necessary infrastructure,” says a banker. “There has definitely been a split between the banks and those prepared to work on loss-making deals.”
What activity there was could be divided into two types: the plain-vanilla lending that most large foreign investment banks decided to stay away from and business driven mainly by acquisition financing and leverage buyouts.
The loan deal of the year goes to JPMorgan and Cho Hung for their successful and groundbreaking leveraged buy-out of Haitai Food Products in Korea. In March UBS Capital, JPMorgan Partners and CVC Asia Pacific submitted a proposal to buy the confectionery business of Haitai Confectionery Company. They brought in JPMorgan and Cho Hung to underwrite the financing. The deal was a landmark for a number of reasons.
The W314 billion ($240 million) financing was the first bankruptcy LBO deal out of the country. Haitai was declared insolvent in 1997. The deal had to be structured around Korea’s bankruptcy regulations, which proved challenging. “Because it was the first bankruptcy process there were many stops and starts as we waited for regulatory approvals,” explains Paul Bartlett, JPMorgan’s managing director and head of Asia Pacific debt capital markets. The approval for the acquisition was finally granted in August.
When the deal was closed at the end of September it was the first LBO syndicated loan facility to be successfully closed in Asia in 2001. Bartlett is also proud of the structure. In order to attract a broad spectrum of offshore and Korean investors, it was felt necessary to create a multi-currency structure in US dollars as well as Korean won. It definitely worked. After approaching 13 possible lenders, JPMorgan received commitments of W725 billion, over two times subscribed. Bartlett says: “This looked and smelt like an international LBO, but the fact is, the address was Korea.”
The term credit facilities consisted of three tranches, two of five-year tenor and one of seven years. Stretching one of the tranches to seven years created the longest-term loan financing for an LBO out of Asia.
“Deals breed deals,” says Bartlett. “And we will now see a whole list of other deals like this that are now possible in Korea.” There is an estimated $10 billion pipeline for LBO deals that will come out of Asia in 2002.
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