Deals of the year 2004: Innovation feeds yield-hungry buyers

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Innovation on the part of issuers and their bankers along with robust risk appetite from investors shaped the capital markets in 2004.

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Asia

Best equity deal
Thai Oil Public Company
Type of deal: Privatization IPO
Deal size: $704 million ($788 million post-greenshoe)
Date: October 2004
Joint international bookrunners: JPMorgan, Merrill Lynch, Morgan Stanley
Joint domestic bookrunners: Finansa, Phatra Securities, SCB Securities

As proof that biggest is not always the best, the award for Asia's best equity deal in 2004 goes to the relatively modest Thai Oil offering, which was flawlessly executed by the company and bookrunners alike.

Last year was hardly a vintage one for IPOs in the region. Even with some solid and very large deals, including India's $1 billion Tata Consultancy Services and $1.8 billion Ping An Insurance from China, the IPO bandwagon, despite an auspicious start, never really got going.

Against this backdrop, the privatization of Thai Oil, the largest ever Thai IPO and the biggest in southeast Asia for years, stands out as an example of how to get a deal done in tricky markets. In a weak domestic market that had clearly run out of steam after 2003's run, the company launched its IPO at the end of September when the Hutchison International and Starhub IPOs were both seeking cash. Despite these challenges, the management team amassed an order book of more than $10 billion from 400 institutions in a little over a fortnight, no doubt helped by the favourable oil price environment.

Given the strong demand, the deal priced at the top of its range in mid-October, at a prospective PE ratio of seven, a respectable premium to its peer group. Aftermarket performance has been as impressive, with the share price climbing steadily since trading began, standing at the time of writing at a premium of 60% to the issue price, comfortably outperforming its benchmark indices. It was an impressive result from what was a basket case bankrupt a few years ago. Chris Leahy

Equity deal- commended
LG. Philips LCD
Type of deal: IPO
Deal size: $1.059 billion ($1.11 billion post-greenshoe)
Date: July 2004
Joint bookrunners: LG Investment & Securities, Morgan Stanley, UBS

The IPO of LG.Philips LCD, a joint-venture manufacturer of LCD displays in Korea, might seem an unusual candidate for a commendation for Asia's best equity deal of the year. The order book was covered in the marketing, but only just. The share price after-performance has been pedestrian, slightly underperforming the KOSPI index. It might seem an unremarkable IPO, but in fact it's amazing it happened at all.

Launched in July at a time when market sentiment was mixed, the deal had to overcome the year's first US rate rise, a reversal of foreign fund inflows and a downturn in global technology issues. The perseverance of UBS, Morgan Stanley and LG Investment & Securities in pushing through one of Asia's largest and most challenging deals of the year is itself creditworthy.

What really makes the deal stand out, however, is the fact that the IPO was the first ever concurrent listing on the Korean and New York exchanges: a feat made possible by the ability of Morgan Stanley and UBS to obtain detailed regulatory changes to the Korean securities laws. It was the first Korean IPO ever underwritten by an international bank. CL

Best M&A deal
Anheuser Busch's acquisition of Harbin Brewery
Deal size: US$774 million equivalent
Date: June 2004
Advisers: (to Busch) Morgan Stanley, (to Harbin Brewery) CLSA

There were several strong candidates for M&A deal of the year, including Citigroup's timely US$2.7 billion acquisition of Koram Bank in Korea and the ingenious $709 million three-way merger between Thai Military Bank, DBS Thai Danu and IFCT. However, bank consolidation is a long-established theme in Asia and there were several such transactions across the region.

Anheuser-Busch's US$774 million takeover of China's Harbin Brewery, however, is clearly a ground-breaking transaction and is likely to be considered the deal that heralded the start of the consolidation of China's non-strategic industries – a trend that may be one of the most significant in corporate finance for years to come.

The deal is important enough for that reason but the manner in which it took place also merits recognition, as China's first contested takeover and the first foreign takeover of a Chinese brewery. When SAB Miller, already a 29% shareholder of Harbin Brewery, fell out with the management, Harbin terminated its strategic investor agreement in May with the UK-based brewer. Anheuser-Busch was quick to step in. It acquired its own 29% stake in Harbin from a financial investor consortium, immediately prompting a hostile bid for Harbin from SAB Miller.

Anheuser-Busch and Morgan Stanley had clearly done their homework, however. The US brewer quickly acquired a further 7% stake, positioning itself as a white knight and launching a mandatory takeover bid for Harbin at a knockout price of HK$5.58 per share, an equivalent exit price of US$774 million.

Critics have suggested that at a price of more than five times book value, Anheuser-Busch won the deal because it overpaid. In fact, Harbin's strategic value, adding another major Chinese beer brand to Anheuser-Busch's Budweiser and Tsingtao brands and in an area of China where it had been weak, more than justifies the price.

Although the premium over book value was high, this says as much about how poorly valued some Chinese businesses are, because of their opaque dual share structures and inefficient financial markets, as it does about the largesse of the buyer.

As multinationals wake up to the fact that full voting control of mainland Chinese businesses is now available in a vast range of non-strategic industries, state privatization will get seriously under way and competition for high-quality Chinese assets will intensify. Once that happens, the prices multinationals will be willing to pay might come to make Anheuser-Busch's outlay pale in comparison. CL

Best investment-grade bond
Telekom Malaysia
Type of deal: 10-year bond
Deal size: $500 million
Date: September 2004
Joint bookrunners and joint lead managers: CIMB, Deutsche Bank, UBS

Telekom Malaysia wins the award on the basis of efficacy, efficiency and speed. The deal launched in September with initial price guidance of a premium over 10-year US treasuries in the high teens. By the time it came to pricing, bookrunners UBS, Deutsche Bank and CIMB had generated orders of 10 times the $500 million issue in three days from 187 institutions, enabling the price to be tightened to 112 basis points over treasuries, at a yield of 5.282%, the lowest achieved by a Malaysian company for 10-year paper since the 1997-98 crisis.

Moreover, the deal priced inside the previous Malaysian corporate benchmark, oil company Petronas, and, helped by a timely upgrade from Moody's, it even priced inside the sovereign benchmark.

Telekom Malaysia's bond achieved the best pricing of any 10-year deal from an Asian telecom – and that list includes SingTel, Korea Telecom and Hutchison.

With demand generated for the bond from almost 200 Asian and international institutions, Malaysia is well and truly back on the investment map of international fund managers. The only blemish on an otherwise flawless deal is that just 4% of demand was from US institutions. CL

Best sovereign bond
Hong Kong SAR
Type of deal: five-, 10- and 15-year inaugural global bond
Deal size: HK$20 billion equivalent total
Date: July 2004
Joint global coordinators: BOCI, HSBC, Merrill Lynch
Joint bookrunners and lead managers: (US dollar tranche) BOCI, Goldman Sachs, HSBC, Merrill Lynch, Morgan Stanley, (HK dollar tranche) BOCI, Citigroup, HSBC, Merrill Lynch

Fred Ma, secretary for financial services and the treasury in Hong Kong, decided to assemble a strong team of bankers for the launch of the special autonomous region's inaugural bond. Despite the good intentions, however, even the appointment process was messed up, according to one insider, when the government initially mandated banks on price alone, leaving it with a team of advisers that had never marketed a retail offering in Hong Kong before. Additional appointments were hastily made and the result was a list of advisers that reads more like a team sheet for a football match than a bond offering.

After the initial slip-up by the government, however, the bond offering proceeded normally and the issue wins the award for the excellent execution of what was always going to be a complex deal. A global bond offering with three institutional tranches, one US dollar 10-year bond, and two Hong Kong dollar bonds, (five-year and 15-year) as well as two Hong Kong dollar retail tranches (two-year and four-year), the transaction was completed in July within four weeks and generated demand across the board of US$7.4 billion for a total issue of US$2.6 billion.

So strong was demand for the US dollar issue, given the scarcity of Hong Kong SAR credit, that the issue size was increased to US$1.25 billion after total demand reached US$5.1 billion. Pricing was tightened on both the US dollar and Hong Kong dollar tranches with the US dollar tranche pricing through the initial range to settle at 74 basis points over 10-year US treasuries.

The successful offering of a Hong Kong dollar 15-year issue to local institutions helped to extend the government yield curve, although the number of institutions that subscribed was perhaps disappointing at 17, compared with the 147 that bid for the US dollar tranche.

What set this deal apart from most other sovereign deals, however, was the extent of the retail offering. Intent on widening the ownership of debt instruments in the territory, the government made sure that the deal was attractive to Hong Kong's notoriously fickle punters. Priced at attractive yields compared with local deposit rates, the issues proved highly popular. Local retail banking heavyweights Citigroup and HSBC ensured the widest possible coverage, resulting in almost 35,000 individual investors subscribing for the retail issues.

The largest ever multi-currency offering from the region and the largest ever Hong Kong dollar bond – all in all a very satisfactory result for the Hong Kong government, which presumably breathed a huge sigh of relief after recent mishaps. CL

Sovereign Bond- commended
Islamic Republic of Pakistan
Deal type: 6.75% five-year FRNs
Deal size: $500 million
Date: February 2004
Joint lead managers and book runners: ABN Amro, Deutsche Bank, JPMorgan

Pakistan's return to the debt markets in February after an absence of four years was met with such enthusiasm by the investment community and marked by such strong execution that the issuer won Euromoney's best sovereign borrower award last year. The deal itself is worthy of mention as a close runner-up to Hong Kong's global bond.
The challenge was considerable given Pakistan's previous position as a near-pariah state. Yet it was helped by its new-found favour with the US after its support with the war in Afghanistan and a compelling investment case following its strong economic recovery. Bookrunners ABN Amro, Deutsche Bank and JPMorgan executed the deal within just two months.

With $2 billion of demand, four times the sum sought and 54% of orders from Europe, the deal priced through the price band for BB-rated emerging market bonds, despite the country's single-B status. In trading, the deal tightened a further 10 basis points, evidence that pricing was keen yet left something for investors. CL

Best non-investment grade bond
Panva Gas Holdings
Deal type: seven-year 8.25% senior unsecured notes
Deal size: $200 million
Date: September 2004
Joint bookrunners: Merrill Lynch, Morgan Stanley

Arguably, the success of the Panva Gas offering owes much to the earlier similar transaction for Sino-Forest (see below), also launched by Morgan Stanley. What tips the scales in favour of Panva Gas, however, is the superior execution of the transaction and the after-market performance.

A Hong Kong-domiciled piped gas and LPG company operating in mainland China, Panva Gas initially aimed to raise $150 million from a high-yield issue to fund business expansion. Following the success of the Sino-Forest structure, Morgan Stanley and Merrill Lynch launched this transaction in September with initial price guidance of an 8.5% yield. By the time the deal was 10 times subscribed, the issue size was raised by $50 million and priced at a yield of 8.25%. More than 130 international institutions invested. Aftermarket performance was impressive, with the deal tightening to a yield of 7.2%, further evidence of consistent investor appetite.

Together with Sino-Forest, Panva Gas has helped to establish a benchmark for high-yield issues from China, an asset class that can only grow in size as companies there keep expanding. Morgan Stanley can feel pleased with itself, having launched all three China high-yield deals in 2004. CL

Non-investment grade bond- commended
Sino-Forest Corp
Deal type: seven-year 9.125% senior unsecured notes
Deal size: $300 million
Date: August 20043
Sole bookrunner: Morgan Stanley

Sino-Forest Corporation's was the first high-yield issue out of mainland China, and the success of the deal from the Canada-domiciled timber products company with operations in China paved the way for the highly successful Panva Gas offering (see above).

Launched in August as a $200 million offering, the transaction attracted demand of nearly $1 billion, enabling Morgan Stanley to increase the size to $300 million and price the transaction at a yield of 9.125%, perhaps a tad generous given aftermarket tightening. More than 80 investors bought the deal, with 48% of the demand coming from US investors.

The aftermarket performance reflected what rivals felt was generous pricing, with the notes trading up strongly to offer a yield of 6.6% in mid January 2005. Given the pioneering nature of the deal, however, such criticisms are overly harsh. CL

Best securitization
Hong Kong Link 2004 Limited
Deal type: securitization of Hong Kong SAR government-owned tolled tunnels and bridges
Deal size: HK$6 billion
Date: May 2004
Sole global coordinator: HSBC
Bookrunners: (institutional offering) Citigroup, HSBC; (retail offering) HSBC

The Hong Kong government's funding requirements have given rise to some interesting and innovative transactions. The securitization of its tolled bridges and tunnels in May is chief among them. Outside Japan, the Hong Kong Link 2004 deal was Asia's largest ever securitization and the first of tolled facilities.

Significantly, it was also the first securitization to be marketed to retail investors in Asia. Hong Kong's street-wise investors, never known to pass up a bargain, flocked to the banks to pick up application forms to subscribe for a deal that was priced to sell: a series of three bonds of three-, five- and seven-year maturities at attractive yields to prevailing domestic deposit rates. The predictable result was 35,400 applications for HK$7.6 billion (almost US$1 billion) more than three times the amount on offer.

The institutional tranches received equally strong demand, with the Class A1 and A2 notes 3.2 times and 4.2 times subscribed respectively. Indeed, perhaps the most impressive result was that by far the largest tranche, the institutional offering of secured floating rate notes due 2016 totalling HK$3.08 billion, met such huge demand of almost HK$13 billion.

Cynics have pointed out that the government could have raised money more cheaply and more quickly from a simple bond issue. But the government clearly had plans well advanced for its inaugural bond and the decision to proceed with such an innovative funding structure in an effort to encourage wider ownership of such investments is to be applauded. Once the government finally gets its LINK real estate investment trust off the ground, Hong Kong's securitization market might benefit from a real shot in the arm. CL

Best loan deal
PT Kaltim Prima Coal
Deal type: senior secured syndicated loan
Deal size: $385 million
Date: August 2004
Mandated arranger and sole underwriter: CSFB

Both Indonesian company Kaltim Prima Coal (KPC) and CSFB deserve credit for the perseverance shown in getting this deal to market. Begun as a US dollar bond offering in May 2004 designed to refinance existing loans, the deal was pulled after excessive market volatility. Having flirted with a possible securitization, eventually CSFB convinced its client that a syndicated loan would work.

In August, CSFB launched a $310 million to $385 million senior secured term loan. To assist KPC with its requirement to repay its existing loans within 30 days of notification, CSFB agreed to hard underwrite the minimum $310 million required.

The loan was structured with a project finance-like security structure including what were dubbed offshore waterfall mechanisms that ensured that US dollar cash payments from coal purchasers were captured as well as other security safeguards and pledges. The integrity of the security package contributed to a loan rating of Ba2 from Moody's – the highest for any Indonesian debt since the 1997-98 financial crisis.

Marketing the deal, CSFB generated orders of $686 million with 24 institutions participating in the final syndicate, 98% of which were overseas accounts. The deal priced at Libor plus 4% for a 2.5-year tenor, marks the largest syndicated loan and the largest underwritten debt issue from Indonesia since the Asian crisis. What makes the deal even more impressive is that it was completed despite the obvious tremors caused by the Jakarta bomb and the presidential elections in September. CL

Loan deal- commended
Wynn Resorts Macau
Deal type: senior secured facilities
Deal size: US$397 million
Date: September 2004
Mandated arrangers: Deutsche Bank, SG

Macau's re-emergence from economic obscurity to new Asian mini-tiger has spawned a slew of questionable transactions. The US$397 million loan deal for Wynn Resorts Macau is not one of them.

Transactions like this put Macau on the banking map for all of the right reasons: the first limited-recourse financing ever in the enclave and Asia's first limited-recourse gaming deal. Given the frenzied level of economic activity as Macau prepares to steal Las Vegas's crown as the world's top gambling venue, the Wynn Resorts Macau deal is likely to stand as the benchmark against which future deals will be gauged.

Pulled together as part of the US$704 million plan to build the new Wynn Resort, a 600-room hotel with 100,000 square feet of gaming space, scheduled to open in the third quarter of 2006, the loan comprised a seven-year term loan denominated in both US and Hong Kong dollars totalling US$382 million equivalent and a three-year HK$117 million (US$15 million) revolving credit facility. The entire sum was fully underwritten by lead banks SG and Deutsche Bank.

Sixteen international, Chinese and Macanese banks participated in the syndicate, which was oversubscribed by 115%.

The deal was highly structured to build in adequate protections for lenders, given the greenfield nature of the project, and the loan was no doubt helped by the significant sponsor support for the project in terms of equity investment and subordinated lending. Also of great help to the funding was the strength of investor sentiment for Macau investments and the success of the rival Venetian Sands casino which is already operational. Accordingly, the pricing achieved was highly respectable, with the senior secured term loan attracting Libor plus 350 basis points and the revolving credit facility Hibor plus 250bp. Put in context, the Wynn Resorts Macau transaction achieved better pricing than both its own parent's financing terms and that of the Venetian Macau. CL