Western Europe | Emerging Europe | Latin America | North America
TO BORROW A popular football term, 2003 was a year of two halves. The Sars epidemic shut down most of Asia’s capital markets for much of the first six months. But then despite the vicious effect that the illness had on the region’s economy, the speed with which the markets turned around in the second half of the year was impressive.
Equity issuance from key markets, particularly in north Asia, including Korea, Taiwan and China, was exceptionally strong as issuers tapped the markets rapidly when the primary issuance window opened unexpectedly.
Even Japan seemed to emerge from its decade-long economic gloom. It was not just a north Asian story, however. South and south-east Asian markets, particularly Indonesia and India, all provided some significant capital market transactions.
Chris Leahy
Best Equity deal
China Life Insurance Company
Type of deal: initial public offering
Deal size: US$3 billion
Date: December 2003
Joint bookrunners and sponsors: CICC, CSFB, Citigroup, Deutsche Bank
There were several strong candidates for Asian equity deal of 2003, each of which might have walked off with the accolade had it not been for the appearance of China Life Insurance Company at the very end of the year. Impossible to ignore because of its size, China Life cast a shadow over every other equity deal, not just in Asia, but globally. The largest equity deal in the world in 2003, the largest privatization globally and the first Chinese company ever to be priced higher than an international comparable are a few of its achievements.
Weighing in at $3 billion, the IPO for such a vast state-owned enterprise was always going to be a complex and lengthy undertaking. The deal team, comprising four joint global coordinators, spent several years on the transaction, according to Raymond Lee, lead banker on the deal for Citigroup.
The pre-deal restructuring involved hiving off all of China Life’s negative spread policies from the new listing vehicle while ensuring that the full franchise was maintained. This was critical to the deal’s success.
The IPO was launched in a highly favourable market for Chinese deals, although Lee maintains that it stood up on its own merits. “We hit the market at the right time for China deals, but I don’t think it’s luck,” he says. “We all worked very hard – all of the banks, not just Citi. Fundamentally it’s a very attractive macro environment. The industry is very attractive; it’s one of the last insurance markets to be tapped.”
With $80 billion of demand generated by the deal and the Hong Kong retail offer 168 times oversubscribed, generating $20 billion alone, it is hard to argue with Lee’s assessment.
The exceptionally strong demand enabled the sponsors to fix the IPO at a price of HK$3.625 per share (US$18.68 per ADS) a valuation of 1.6 times book value and 19 times 2003 earnings. This represented a premium to all of its European and US comparables, says Lee. “Investors were ready to pay a higher value to latch on to a higher-growth industry,” he says.
Perhaps the only major problem was a last-minute glitch on the Hong Kong retail offer when a printing error caused brief chaos in the local market just ahead of dealings. “It was inevitable something would go wrong on such a large deal,” says Lee, “but we were able to resolve it overnight.”
With the share price opening strongly and now standing at about HK$6, any deal problems are now long forgotten. Time will tell whether the China Life investment ultimately deserves the hype generated in the IPO, but for now the four joint global coordinators can bask in the glory of what was comfortably Asia’s most successful equity deal of 2003. “The deal went beyond our expectations,” says Lee, “the reception that we received [from the market] went beyond our wildest dreams.”
CL
Equity deal – commended
Bank Mandiri
Type of deal: initial public offering
Deal size: $327 million
Date: June 2003
Joint bookrunners and global coordinators: ABN Amro Rothschild, CSFB, Danareksa
The Bank Mandiri initial public offering completed in June reopened Indonesia’s equity market to international investors after it had remained pretty much closed since Asia’s 1997-98 financial crisis.
Apart from being the country’s first IPO since 2000 and the largest since 1996, it was heralded as a watershed for the Indonesian government’s efforts to restructure its ailing bank sector.
“If you had said a year ago that by the end of 2003 there would be three large IPOs raising $1 billion for the Indonesian government, people would have looked at you as if you were deranged,” says Matthew Kirkby, head of equity capital markets at joint bookrunner and global coordinator ABN Amro Rothschild.
According to Kirkby, though, getting international investors to reconsider Indonesia was not as difficult a task as many had predicted. “There was a sense it was a bit of the land that time forgot,” he says. “There were low valuations and good growth prospects. It was about getting people to have another look at Indonesia.”
Since international markets had developed new conventions since the last major Indonesian IPO, Kirkby says there were several structural issues that needed to be addressed. Chief among these was the need to convince the government to alter the rules on fixed amounts of retail offerings as well as truncating settlement timetables, to maximize flexibility for the offer. “The government didn’t give us everything we wanted,” Kirkby says, “but they heard us out and if they could accommodate us, they did.”
ABN Amro Rothschild and CSFB between them generated sufficient demand from international investors to cover the order book 10 times. Significant demand was generated outside Asia, with 37% of the deal taken up by European investors and 33% in the US.
When dealing began, the shares immediately shot up 26% and are presently at a 52% premium to the issue price. This raises perhaps the only criticism of the deal – that it was priced too cheaply.
Kirkby acknowledges the criticism but disagrees that the bank was undersold. “I’m sure there will always be people who will say we underpriced it,” he says. “We probably could have upped the price range, but you have to look at it in the context of the situation. The government was very pragmatic; they’ve got huge privatization plans and they didn’t want to see investors lose money.”
The IPO was clearly priced to sell, at an undemanding 1.08 times book value that just beat the government’s minimum price for the disposal. Given that considerably more was riding on the outcome than a maximization of proceeds, however, it seems unlikely that any other banks that might have been called in would have acted differently.
CL
Best M&A deal
Ripplewood Holdings
Type of deal: acquisition of Japan Telecom from Vodafone
Deal size: $2.2 billion
Date: October 2003
Advisers: Goldman Sachs (buy side), UBS (sell side)
Private-equity firm Ripplewood Holdings’ October acquisition of the fixed-line assets of Japan Telecom Holdings from 66.7% owner Vodafone stands out as the biggest ever Asian leveraged buy-out. The transaction has helped to reshape the Japanese M&A market, especially the leveraged buy-out sector, opening up a
hitherto closed market to international buyers. This justifies its billing as Asia’s best M&A deal of 2003.
Ripplewood had already completed several transactions in Japan before Japan Telecom. With this latest deal, it has committed capital totalling $3.5 billion in Japanese private-equity investments, making it the clear market leader.
According to Steven Thomas of UBS in Tokyo, who advised Vodafone and Japan Telecom, Ripplewood’s involvement started soon after the collapse of the original deal to sell Japan Telecom to Tokyo Electric Power.
“From August and September 2002, Ripplewood very persistently and persuasively approached Vodafone to pitch their story,” he says. “It was a classic entry point for an LBO firm.”
Despite the inevitable appearance of other leveraged buy-out and private-equity firms, UBS decided not to pursue the customary auction route but entered into exclusive discussions with Ripplewood and adviser Goldman Sachs. “Various enquiries were fielded, but Ripplewood quickly emerged as the firm making the running,” says Thomas. “They had the best-organized proposal and, happily, we found ourselves talking to credible people.”
Large leveraged buy-outs are necessarily complicated and protracted and the Japan Telecom transaction proved to be no exception.
“We had the usual narrowing of buyer and seller expectations: that took a while,” says Thomas, “but the key was the ability of Ripplewood and the Vodafone side to present a deal that was financeable by the banks.”
Since the buy side required that two-thirds of the deal be debt-financed, putting together a credible banking syndicate was critical. The Japan Telecom transaction brought groundbreaking progress with Japanese banks, says Thomas. “It was the first time ever that the Japanese banking community has stepped up and lent to a deal like this, based on cashflow and prospects,” he says. “Once the Japanese banks got the hang of what was going on, at quite an early stage they started to drive the process. They were in no way hangers-on or spectators.”
In the wake of the Japan Telecom deal, Thomas is optimistic that the Japanese market will continue to open up to foreigners, but he cautions against xpectations of a flood of deals.
“Every deal that gets done, and happily, is one step forward for the Japanese M&A market,” he says. “The Japanese banks really got their head around it this time. The old days of M&A being a dirty word in Japan are gone. But the willingness of Japanese companies to sell businesses is very different.”
CL
M&A deal – commended
AIG/Newbridge Capital
Type of deal: acquisition of 39.6% interest in Hanaro Telecom
Deal size: $1.1 billion
Date: October 2003
Advisers: Morgan Stanley (buy side), JPMorgan (sell side)
The investment by US private-equity houses AIG and Newbridge Capital in Korea’s second-largest broadband telecommunications provider, Hanaro Telecom, always seemed unlikely to come off. Its success is a testament to the perseverance and hard work of all parties. It is a landmark for corporate governance in Korea and earns the deal a commendation as one of the key M&A deals of 2003.
In a country where the rights of minority shareholders come a distant second to those of majority holders and often the management (which is often close to or synonymous with major stakeholders), the Hanaro Telecom deal stands out as the first successful proxy contest in Korea. In a determined attempt to restructure its debt-ridden business, Hanaro’s directors and management joined forces with foreign investors Newbridge and AIG to fight the company’s largest shareholder, Korean conglomerate LG, which wanted to buy Hanaro to merge it with its own telecoms interests.
The contest captured the attention of the entire nation, says Brian Hong of JPMorgan, Hanaro’s adviser. “In a country that seems not necessarily the friendliest to foreign investors,” he says, “the company was able to rescue itself and determine its own destiny.”
To ensure the AIG/Newbridge deal had a chance to succeed, Hanaro management lobbied every shareholder in the company it could find, as well as using the media to get its message across. “They basically called everyone in the country,” says Hong. “It was in the national press for weeks. It was a bit like the OJ Simpson trial: you couldn’t find anyone who didn’t know about it.”
The efforts paid off and 78% of shareholders voted the deal through. It was also the first time a Korean union sided with foreign investors over a local party. The $500 million equity injection and $600 million of new indebtedness enabled Hanaro to reschedule $1.6 billion of borrowings, restoring the solvency of Korea’s only competitor to Korea Telecom.
CL
Best Investment grade bond
Hutchison Whampoa
Deal size: seven-, 10- and 30-year global bond
Value: $5 billion
Date: November 2003
Joint bookrunners and joint lead managers: Citigroup,
Goldman Sachs, HSBC, Merrill Lynch
Hutchison Whampoa has a longstanding reputation for launching notable deals. Its $5 billion, three-tranche global bond offering is no exception, weighing in as the largest corporate bond of the year in Asia ex-Japan and the second-largest bond globally. The huge size, significant demand and attractive pricing make it the best Asian bond deal of 2003.
Originally launched as a $3 billion offering and completed in just three days, the size was quickly increased to $5 billion when the two-day roadshow, using two teams in five locations, generated demand of almost $13 billion. This also enabled the managers to price the three bonds at the top of their indicative price ranges. The strength of interest from the US was a key driver. Investors there accounted for the majority of orders in all three bond series, with their demand in the 30-year bond reaching 70%. According to Citigroup, US accounts were attracted by the yield premium over US credits offered by the Hutchison bonds.
Pricing was aggressive, with the seven-, 10- and 30-year series priced at spreads of 185, 205 and 240 basis points respectively over equivalent US treasuries. The launch was also well timed as US treasury yields tightened and the Hong Kong benchmark spread contracted following credit upgrades for China and the Hong Kong Special Administrative Region.
This deal enables Hutchison to refinance some of the non-recourse debt raised to develop 3G services, which stands at the equivalent of $5.45 billion. According to joint bookrunner HSBC, it also increases the average maturity profile of Hutchison debt from an average of 5.31 years to 7.84 years. Given the well-publicized challenges facing participants in the 3G market, Hutchison will be well satisfied with the result.
CL
Best Sovereign bond
Republic of the Philippines
Deal size: $750 million
Date: July 2003
Joint bookrunners and lead managers: Citigroup, Deutsche Bank, JPMorgan
Competition for best Asian sovereign bond of the year was between Korea, China and the Philippines. The Philippine bond won because of the difficult circumstances in which it was launched. In those circumstances, getting a benchmark-sized bond that could even get away, let alone one with strong pricing, was impressive.
The cancellation of Philippine national power corporation Napocor’s bond offering a fortnight earlier meant that the government would need to step in to help with the company’s 2003 financing needs. Capital was required quickly and in addition to Citigroup, which worked on the original Napocor deal, the government drafted in Deutsche Bank and JPMorgan.
In a deal launched and closed within nine days of mandate, orders of $2.5 billion were generated within 11 hours, five times the projected offering of $500 million. This enabled the deal size to be raised to $750 million.
“It was a difficult deal,” says Rahul Mookerjee of joint bookrunner and lead manager Deutsche Bank. “The Napocor deal was pulled and the government realized it wasn’t going to be a straightforward financing. We went to investors and said: ‘That’s off the table [the Napocor deal], here’s a real deal: this is the Republic of the Philippines’s yield curve – you know it.'”
According to Mookerjee, the government bond was successful because most bond investors are wary of illiquid deals. “If you do a deal in benchmark size, investors need to know there’s going to be liquidity.” Citigroup, Deutsche Bank and JPMorgan were able to allocate the $750 million bond to over 220 international investors, ensuring strong liquidity in the aftermarket. “Despite the political noise from the Philippines,” says Mookerjee, “the whole [yield] curve has been OK.”
CL
Best Non-investment grade bond
ICICI Bank
Deal size: $300 million
Date: October 2003
Joint bookrunners and lead managers: Deutsche Bank, Merrill Lynch
At a tight 146 basis points over equivalent five-year treasuries, the $300 million high-yield bond from India’s ICICI Bank probably justifies the title of best non-investment grade bond on pricing alone. It was also the first international bond to come out of India since 1997, demonstrating strong demand for Indian paper, the quality of the ICICI Bank credit and its strong growth story.
“It’s a bit of a push calling it a high yielder,” says Rahul Mookerjee of joint bookrunner and lead manager Deutsche Bank. “The government restricts issuance of US dollar debt and ICICI benefits from a split rating: it’s rated one notch above the sovereign [risk] by Moody’s and S&P has them at the sovereign ceiling.”
The government’s restrictions on US dollar-denominated debt helped the deal find strong demand from international investors. Deutsche Bank and Merrill Lynch generated $1.5 billion of demand from 170 investors, 44% from Asia, 41% from Europe and just 15% from the US. The strength of demand enabled the deal to be priced at the bottom of the pricing range.
According to Mookerjee, the strength of response from investors is an indication of the quality of the ICICI credit as well as strong demand for quality Indian issues. “ICICI spent a lot of time on this deal and on investor relations,” he says. “There was also a scarcity factor: quality Indian borrowers out of India just haven’t been happening.”
Mookerjee is hopeful that a review of the Indian government restrictions on foreign debt issues may be relaxed soon [see Rating upgrade further fuels rising market, this issue]. “We’re expecting a clarification of policy to make it [issue approval] automatic for a certain kind of issuer,” he says. “They’re trying to avoid a bubble in overseas debt. They’ll probably permit longer-term deals from quality borrowers.”
CL
Non-investment grade bond – Commended
PT Indosat
Deal type: 7.75% guaranteed notes 2010
Deal size: $300 million
Date: October 2003
Joint bookrunners and lead managers: Barclays Capital, Goldman Sachs, ING The largest Indonesian bond since 2001 and part of a $825 million landmark restructuring deal, the $300 million financing, like the Bank Mandiri IPO, has played a key role in putting Indonesia back on the international capital markets map.
Priced at 410.5 basis points over US treasuries, the deal was rated above the sovereign risk by Standard & Poor’s and achieved the highest credit ratings of an Indonesian corporate, according to joint lead manager Goldman Sachs which was also the company’s sole ratings adviser.
Strong demand from investors enabled joint bookrunners Barclays Capital, Goldman Sachs and ING to increase the size of the offering by $100 million, leaving the deal 2.5 times subscribed. Demand was 75% Asian, 19% European with just 6% US. The bonds have performed well since launch and are trading at a premium to the issue price.
CL
Best Securitization
Industrial Bank of Taiwan
Type of deal: corporate loan securitization
Deal size: NT$2.766 billion ($82 million)
Date: December 2003
Arranger: SG
This deal is a NT$2.766 billion ($82 million) securitization of a pool of bilateral and syndicated loans for Industrial Bank of Taiwan. As the first ever asset-backed securitization in Taiwan and the first successfully executed transaction under new Taiwanese legislation, it should pave the way for more ABS deals from this market.
SG deserves credit for sticking to its guns in getting this deal away. Originally slated to launch in 2002, the transaction was delayed until February 2003 following hold ups in necessary legislation. SG also faced big hurdles to a successful completion of the deal, including legislation, tax, and legal issues that had to be resolved before the transaction could proceed.
The securitization covers a static pool of corporate bilateral and 41 syndicated loans originated by IBT, which generated its own problems about security enforcement and industry concentration. Average maturity is 2.2 years and final maturity is in July 2011.
CL
Best Loan
Japan Telecom
Type of deal: senior credit facilities
Deal size: ¥224 billion ($1.87 billion)
Date: October 2003
Mandated lead arrangers and joint bookrunners: ABN Amro, Citigroup, Crédit Lyonnais, ING, JPMorgan, Mizuho, Norin Chukin, Sumitomo Mitsui, Tokyo Mitsubishi, UFJ, WestLB
These ¥224 billion ($1.87 billion) senior credit facilities were a key element in the success of a landmark transaction, as they were used to part finance Asia’s largest ever LBO – the acquisition of Japan Telecom by Ripplewood Holdings [see Best M&A Deal].
Twenty-one banks from seven countries joined the syndicate, including a large number of Japanese banks that historically have not been comfortable with cashflow-based lending. Given the importance of structuring equity and debt capital so as to generate the returns from a leveraged transaction, Ripplewood required two-thirds of the purchase price to be debt financed.
“This was completely new ground,” says Neil Galloway of mandated lead arranger ABN Amro. “Nothing had ever been done in Japan on this scale before. We were guessing how the Japanese banks would react to this.”
One of the critical issues was the mature state of Japan Telecom’s fixed-line business. “It was challenging from a financing point of view,” says Galloway. “The outlook was flat to declining, but it was a good valuation and is very cash generative so it lends itself to a leveraged play.”
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