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| Best M&A deal |
| Nissan |
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Type of deal: acquisition of 50% stake in Dongfeng Motor Amount: $1.03 billion Date: September 2002 Advisers: Goldman Sachs (Nissan), CICC (Dongfeng) |
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Nissan: firm foothold in China |
Carlos Ghosn, Japanese motor company Nissan’s president, had to be very patient. But after two years’ negotiation with Dongfeng Motor Corporation’s management and politicians, he finally got a foothold in China’s auto industry. It didn’t come cheap. For a 50% stake in China’s third-largest auto company, Nissan agreed to pay $1.03 billion in cash.
It is one of the largest individual items of foreign direct investment in China, and the largest in its auto industry. Also, for the first time a foreign company has been granted permission to produce vehicles in China. But it’s not just Nissan getting all the benefits. Dongfeng now has a platform to become a competitive player as part of the partnership and gain foreign experience in restructuring its 120,000-employee business. It will no doubt be expecting Ghosn to turn the company’s fortunes around, just as he did at Nissan.
The deal, which according to some reports had as many as 2,000 people working on it, is a landmark transaction for other important reasons too. Kenneth Courtis, Goldman Sach’s vice-chairman in Japan, says: “What has effectively happened here is not a joint venture but a western-style acquisition. And that has never occurred in China before.” Courtis says that Nissan’s 50% stake will also gain it control of management. And for the next eight years Nissan will be responsible for choosing the company’s president.
This means Nissan can restructure and reform Dongfeng as it wants. And it has also shown other international players that there is another way of entering China. The traditional method of buying a minority stake and having little management control yet at the same time calling it a joint venture could soon be over.
| Best equity deal |
| Bank of China (Hong Kong) |
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Type of deal: initial public offering Amount: £2.8 billion Date: July 2002 Advisers: Bank of China International, Goldman Sachs, UBS |
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BoC: landmark financial sector deal |
The initial public offering of Bank of China (Hong Kong) was the most significant from Asia in 2002 and a landmark in the reform of China’s financial sector. While the IPO was ultimately successful, things could have turned out differently. The scaled-back offer for China Telecom in November showed that being large and Chinese was no guarantee of success in the equity capital markets last year.
It had taken nearly two years of restructuring to get the bank into a form that would be attractive to international investors. But with global equity markets on the slide some bankers close to the deal were extremely nervous as it came to market. As one said at the time: “Fund managers were getting their legs blown off and I was beginning to feel that we might not be able to get the deal done in the style that we wanted.” But they held their nerve.
In a meeting in a coffee shop at Heathrow airport Lui Minkang, chairman of BOC Hong Kong and Bank of China, made it clear that there would be no going back. The bank would be listed in Hong Kong. “The markets were the worst for 30 years,” says Marcus Brown, UBS’s director of equity capital markets. “And if we had postponed the deal then it would have put months on the timetable. And some deals when they are postponed actually end up never getting done.”
With markets so volatile, pricing was always going to be challenging. And there was a lot of squabbling behind the scenes. Advisers Goldman Sachs and UBS pushed for HK$8 a share. Liu went for HK$8.50. There was no discussion. Liu thanked his advisers for their time and left.
“Liu went around the world and got $18 billion of demand in a market tanking like a stone, so when he hears low eights with the optionality of mid eights, he had to be confident,” says a banker. Liu’s confidence was repaid: 25% of Bank of China (Hong Kong) was listed for $2.8 billion and the IPO was six times oversubscribed. And although the share price has since fallen, in line with the markets, the deal proved that it was possible to sell a Chinese bank to international equity investors.
| Highly commended |
| Telecom New Zealand |
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Type of deal: secondary accelerated global tender offer Amount: US$782 million Date: September 2002 Lead manager: Merrill Lynch |
Merrill Lynch’s $782 million block trade of Telecom New Zealand stock for vendor Verizon Telecommunications was a deal that most Australian investment banks wanted to be part of. Verizon, one dealer says, got the deal it wanted because it had the banks chomping at the bit by keeping competition and pressure high.
All the banks knew that Verizon wanted to sell its 20% holding in Telecom New Zealand – it had after all asked five or six banks to come and talk – it was just a question of when and how. “The number of banks chasing this deal meant it was very competitive. It was a deal that was very well telegraphed to the market,” says a banker. In the end Merrill Lynch won the day. “Because everyone was talking about it, the trade started to gain its own momentum,” says Andrew Podgornick, Merrill’s vice-president of the global equity new issue group. “So much so that by September we formed the view that we would be able to place the deal overnight and so we pitched for the accelerated global tender.”
There were two main challenges. First, it was going to be the largest ever block trade from Australia. Second, Verizon wanted US dollars. Changing US$800 million-worth of New Zealand dollars was going to be tough – analysts feared the exchange rate could swing by as much as 4%. “We were collecting NZ$1.7 billion. So we had to start thinking how we could change two days of trading market volume back into US dollars without upsetting the market,” says Podgornick. “But getting comfortable with the forex side of the transaction was key to us winning the deal.”
The bankers involved in the deal estimated that they were going to sell 20% of the stock to Australia, 10% in New Zealand and the remainder to funds in the rest of the Asia-Pacific region. It occurred to them that the Australian investors probably wouldn’t mind paying in Australian dollars. In addition, the majority of Asian Pacific fund managers would be US dollar or sterling-based anyway. So Merrill simply asked them to settle in US dollars rather than buying New Zealand dollars and paying that way. Only NZ$80 million, the 10% New Zealand bid, had to be changed into US dollars.
The deal flew. On September 26, two days after US markets hit new lows, Merrill had 150 bids – four worth over US$100 million. It was the right stock at the right time.
| Highly commended |
| SK Corp |
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Type of deal: combined ADR and exchangeable offering Amount: $1.68 billion Date: June 2002 Lead managers: CSFB, Goldman Sachs |
There has been widespread praise for Korea’s economic reforms but there is more to do. Companies need to unwind cross-shareholdings and the privatization programme is still incomplete. Despite this, 2002 was a quiet year, with several deals, such as the state’s exit from Chohung Bank, being postponed.
SK Corp, though, pushed ahead with restructuring as it attempted to deleverage its balance sheet. It was again looking to monetize an 8.2% stake in SK Telecom. Six months previously it had tried something similar but was unhappy with the share price. It was perhaps this first failure that made SK Corp and the banks even more determined to push through Asia’s second-largest equity transaction in 2002.
SK Corp raised $1.68 billion via a 5.1 million share exchangeable and a 2.23 million share ADR sale. Although there can be no doubt that the deal was helped just before pricing by the second-largest one-day rally in the history of the Dow Jones index, CSFB and Goldman Sachs deserve praise for managing to hold the book together in such volatile markets.
The difficulty bankers faced was getting more shares into the hands of investors already clogged with telecoms paper. SK Telecom was aware of this and came out in full support of the deal. The effect was highly positive. For the roadshow SK sent two teams to sell its story. This meant 60 people split into three teams travelling over Asia, the US and Europe, impressing potential investors by screening Spiderman on their mobile telephones during meetings.
For most of these, bankers concentrated on selling the ADR. “We decided not to open the exchangeable until the second week of the roadshow,” says Steve Metcalf, director, head of ECM syndicate for non-Japan Asia at CSFB. “We wanted to make sure that the equity part of the transaction was moving along. And we wanted to minimize the execution risk of the exchangeable and make the process as short as possible.”
Despite the US telecom index falling by around 20%, SK Telecom stubbornly remained in the market. Deepak Rao, an executive director and head of equity-linked capital markets at Goldman Sachs, explains. “Considering the markets, the large equity offering meant the discount would have been very significant,” he says. “That’s a bad strategy to maximize the price. As a result the combination premium on the exchangeable bond and the discount on the equity was very well received by the client.”
The deal was 1.6 times covered. The ADR was taken by 110 investors and 200 went for the exchangeable.
The $2.73 billion, three-tranche offering from Malaysian oil company Petronas was the largest corporate deal from non-Japan Asia and the region’s second-largest bond offering ever.
Because of Petronas’s abundant liquidity, it and its advisers had greater flexibility regarding when and how it would access the markets.
The company was able to increase the 10-year $1.3 billion tranche by 40%. A 20-year $750 million tranche was then added as tranche A’s popularity became apparent. The third tranche was a seven-year e750 million bond, e250 million larger than had been planned previously.
The deal attracted more than $8 billion of orders worldwide. The Asian bid, which tended to stay away from anything euro in the past, didn’t this time: 53% of the euro tranche ended up in Asia. The 10-year and 20-year tranches, by contrast, were snapped up by US investors, with 77% of the longer-dated tranche going to the US.
Stephen Roberts, managing director and head of Asia Pacific fixed income at Salomon Smith Barney, says: “It was not only a reaffirmation of the global capital markets support of the credit but also a show of support for Malaysia and the Asian capital markets generally.”
| Highly commended |
| Korea Development Bank |
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Type of deal: Two-tranche global bond Amount: $750 million Date: November 2002 Lead managers: Barclays, Credit Suisse First Boston, JPMorgan |
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KDB: gave the market what it demanded |
Capital raising by Korean corporates in the first half of 2002 was disappointing. As one banker puts it, Korea didn’t play much until after the summer. But when it did decide to, it made a dramatic entrance. Over the year, Korea issued $6.2 billion in 25 deals, claiming a market share of 35% of new issues out of non-Japan Asia.
But despite upgrades and investors feeling more comfortable with Korea risk, spreads widened. Steve Plampin, head of Asia syndicate for Barclays Capital, explains: “Because the economy is so strong there is a much higher demand for funding, which means that even though there have been upgrades, spreads have, perversely, widened.”
Korean Development Bank’s $750 dual-tranche global offering indicated a borrower that was prepared to show unusual savvy, to listen to the market and give what was demanded. It swapped the tranches of the deal, increasing the 10-year to $450 million from $250 million and cutting the five-year from $500 million to $300 million.
The 10-year tranche is the first of such a length since the Asian financial crisis and so, say bankers, explains the reason for strong demand. “It was perhaps unusual that the 10-year went so well but then there hadn’t been one for so long. But it’s their natural maturity and Korea needs a benchmark in 10 years,” says Plampin.
The size of the orders and distribution caught some bankers by surprise too: 48% of the five-year ended up in the US and only 24% in Asia. For the 10-year it was a similar tale: 49% of the tranche was placed the US, 34% in Asia and 17% in Europe. It was the first time that investors from outside Asia had outnumbered those in Asia in a pure Asia corporate deal. “The US bid drove the pricing,” says Carsten Stoehr, CSFB’s head of debt. US investors were keen to diversify from their own domestic, and sometimes troubled corporates, into strong credits much further away.
The deal also did well amid rumours that the sovereign would be borrowing soon. Plampin says: “It was no secret that the hot topic of conversation was that the Korean sovereign, which has only ever done one two-tranche deal in 1998, was possibly coming. And it could have made it slightly confusing. But why would a country with so much in reserves need to borrow from the market?”
| Best sovereign bond |
| Malaysia Global Sukuk |
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Type of deal: five-year global sukuk (asset-backed bond) Amount: $600 million Date: June 2002 Lead manager/bookrunner: HSBC |
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Kuala Lumpur: Malaysia’s global sukuk has vastly |
Malaysia unveiled the first ever Islamic global bond in 2002. “Malaysia is at the cutting edge of Islamic finance in the local market,” says Stephen Williams, HSBC’s head of debt, Asia. “So it was a natural progression for it to go global.”
Malaysia is a frequent and well-respected borrower, with a strong legal and regulatory infrastructure. And while many sovereigns in the Middle East had discussed issuing offshore with a Shariah-compliant structure such as a sukuk (asset-backed bond), they cannot make similar claims.
Tapping into the $200 billion pool of Islamic funds while attracting mainstream bond buyers was a challenge. Because the collection and payment of interest is not permitted under Shariah law, many international bond funds had never bought an Islamic bond before.
The task for HSBC was to come up with a structure that satisfied Muslim investors as well as conventional ones. “The government wanted a deal that was a global Islamic Shariah-law bond but they didn’t want to pay a huge amount over a conventional deal,” says Williams. In the end the deal was priced flat to where Malaysia would have priced a conventional transaction at 95 to 98 basis points over Libor.
The bond was asset backed through a property deal. The borrower, Malaysia Global Sukuk, bought property for a five-year period. The land was then leased, and the lease payments, the underlying coupon, go to the investors. After five years the government buys back the property at the face value of the bond, irrespective of its value at that point.
Williams claims that getting the message across to the conventional investor was quite straightforward. “We just told them to look at the credit rating, which is the same at both S&P’s and Moody’s,” he says.
Islamic investors took more time to be convinced. The roadshow in the Middle East was very much focused on the structure’s compliance with the Shariah.
HSBC brought in four local banks – ABC Islamic Finance, Abu Dhabi Islamic Bank, Dubai Islamic Bank and the Islamic Development Bank – to help. It was the right thing to do. At the Islamic Development Bank, for example, there was a two-hour theological debate with potential investors about the structure and how it fitted with Shariah law. The investors left convinced.
In the end the deal was increased from $350 million to $600 million and attracted several new accounts to the Malaysian credit. Fully 50% of the deal went to the Middle East. On top of this, 20% was split between the US and Europe.
Williams hopes that non-Islamic borrowers will be tempted to use the structure if they too are looking to diversify their investor base. There is a large amount of liquidity in the Middle East that borrowers are missing out on. And the structure means that Middle Eastern borrowers can now look to diversify their funding by moving away from the traditional Shariah-compliant loan and tapping international investors with a Shariah-compliant bond.
| Best non-investment grade bond |
| Telkomsel |
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Type of deal: five-year bond Amount: $150 million Date: April 2002 Bookrunner: UBS |
Telkomsel’s $150 million offering was the deal that drew investors back to Indonesia. Many had given it a wide berth since the financial crisis of 1997-98. Indofood’s subsequent $280 million deal and a $125 million issue from Bank Mandiri might not have been possible had it not been for what was, in April 2002, Telkomsel’s and Indonesia’s largest bond offering in four years.
Attracting investors was always going to be tough: it was an Indonesian credit and it was in the wireless telecom sector. In 2002, only two such deals were attempted globally: VimpelCom in Russia, and this one. “If you said to anyone in the US or Europe that you were going to attempt such a deal in the wireless sector, they would look at you like you were from the planet Tharg,” says a banker.
To overcome such scepticism, UBS rolled out the big guns. On the roadshow, which took in Jakarta, Singapore, Hong Kong, London and Frankfurt, BG Lee Hsien Yang, Singapore Telecom’s CEO, gave a presentation to investors. Singtel has a 35% stake in Telkomsel. Singtel’s big chief, in a rare moment of humour from a Singaporean boss, gave his blessing to those using his network for their mobile phones. They could keep them switched on, he said. He asked those that weren’t using his network to turn theirs off.
With over 100 potential investors attending the Singapore leg of the tour, it was the best turn-out for an Indonesian corporate ever. At times the organization of the roadshow was just as challenging as persuading investors about Telkomsel’s credit story. In the words of one of those who attended: “UBS looked like they had bought a whole pack of Telkomsel’s management on tour with them. And they had bad habits such as turning up late for meetings. UBS definitely had its hands full.”
But the roadshow succeeded and the deal was increased from $100 million to $150 million. Of the 76 investors, 75% were from outside Indonesia and 30% of those had never invested there before. Of the other 70%, 65% had not entered the Indonesian market since the crisis. The positive sentiment towards the company has persisted, with the bonds continuing to trade above par in the secondary market.
| Best securitization |
| Sunway City (Real Estate Berhad) |
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Type of deal: Secured fixed-rate senior notes Amount: M$450 million Date: October 2002 Lead manager: Deutsche Bank |
The best securitization of 2002 was not one of the large cross-border international deals from Korea, although many of these were strong contenders, but to a smaller domestic deal from Malaysia’s Sunway City.
“This is a true securitization. It looks like one and it smells like one because that’s what it is,” says Raj Shourie, Deutsche Bank’s managing director and head of securitized products group, Asia, about the M$450 million (US$118 million) commercial mortgage backed deal for Sunway City. It might sound an unusual comment but securitization is often viewed with suspicion in Malaysia. Since rules were put in place to allow use of the technique there, deals have failed to attract investors, which have been uncomfortable with structures that appeared to be securitization in name only. However, this deal will undoubtedly change the way investors and corporates view the product.
For Sunway, the deal helped it out of a hole. The company was anxious to get better control of its assets and introduce liquidity to the balance sheet. By the time the securitization was complete, gearing was down from 1.34 times to 0.78 times, which meant its debt was reduced from M$820 million to M$570 million. In addition Sunway’s net tangible assets increased, as did its return on equity.
The deal involved the sale of several properties, including Sunway College and Sunway Lagoon Resort Hotel, to a special-purpose vehicle called Real Estate Berhad for M$450 million. The SPV then issued notes to the same value back to investors. Sunway will lease its former properties back for the next 35 years, but with a clause that allows it to buy them back in five years.
Putting the deal together proved tough for Deutsche Bank. After overcoming the hesitancy of its client, the bank had to overcome the suspicions of a jaded market. The deal was eventually well received and 1.75 times oversubscribed.
| Best loan |
| Acquisition funding for Wallenius and Wilhelmsen |
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Amount: $1 billion Date: December 2002 Arrangers: Citigroup, Korea Development Bank, Korea Exchange Bank |
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Lining up for the boat: Hyundai’s deal to offload |
The loan to fund Wallenius and Wilhelmsen’s $1.3 billion acquisition of Hyundai’s Merchant Marine’s car carrier, was the most complex transaction in Asia in the past decade, reckons Moshin Nathani, Citigroup’s head of loan syndication in Asia.
Hyundai has had big problems since Korea’s financial crisis. And with a downturn in the motor industry and excessive leverage, it needed to strengthen its financial position by selling off assets.
Simply getting rid of its shipping arm could, however, have significantly hampered the company’s ability to distribute its products. For this reason a joint venture was deemed the most appropriate solution. Shipping lines Wallenius and Wilhelmsen (components of Wallenius Wilhelmsen Lines) agreed to take 80% of the car carrier division, with Hyundai keeping the remaining 20%. “It meant Hyundai kept a foot in the door,” explains Nathani.
Once the structure was agreed, financing it came to the fore. It was not an attractive proposition for lenders given the high debt to equity ratio. “There were no assets in this company except for the franchise,” explains Nathani. Citigroup’s and the buyers’ willingness to put up so much based on intangibles such as name and possible future cashflows indicates to Moshin how far Korea has matured in the eyes of international investors.
Citigroup acted as the sole underwriter of tranche A of the loan, worth $300 million, and tranche C, a $100 million annually extendible revolving credit. “That gave a strong message to the market and that is why the deal was well received,” reckons Nathani. Tranche A was syndicated out to 14 other banks. Korea Development Bank and Korea Exchange Bank underwrote tranche B, worth $600 million.
