Euroweek equity roundup, July 23

Euroweek, July 23 2010

Equity capital markets round-up

It’s been a week notable for mandates rather than deal launches. News of the global coordinators on the revived AIA IPO, and lead managers on a rights issue for China Construction Bank, have dominated market discussion.

The appointment of Deutsche, Morgan Stanley and Goldman Sachs in the top AIA roles – as yet unconfirmed by the issuer, but widely known in the market – has been the most closely watched development because of widespread speculation about how those roles might have differed from those announced when AIA first set out on a planned IPO at the start of the year.

Back then, AIA appointed nine banks to run the expected US$15-20 billion listing, with Deutsche Bank and Morgan Stanley as joint global coordinators, Goldman Sachs and UBS senior bookrunners, and Bank of America Merrill Lynch, CCB, Citigroup, Credit Suisse and ICBC on the next rung down.

Prudential’s agreement to take over AIA from parent AIG in late February changed all that, and the float was axed. But when the takeover fell over, the AIA IPO came back into the picture. How, people wondered, would the jockeying and key roles around the failed takeover affect the syndicate positions? Would previous commitments be honoured?

We now know that Deutsche and Morgan Stanley have retained their top-ranking roles, but have been joined by Goldman Sachs. Deutsche and Morgan Stanley were never realistically expected to lose their top spots; there was no reason to drop them and their detailed due diligence on the deal remains valid and valuable. Goldman, though, is an interesting case: it has secured elevation to the top table because it was AIG’s advisor on the Prudential bid, and even refused to take part in Prudential’s planned GBP14.5 billion rights issue at a junior level. This has proven a most lucrative strategy, now rewarded. “Goldman certainly came down on the right side of that trade,” says one banker.

Some had wondered if Goldman’s problems with the SEC, which took action against it for products sold in the lead-up to the financial crisis, would impede this promotion; clearly not, though the settlement of that suit for $550 million last week doubtless didn’t hurt.

“Now we, like many others, are waiting to find out if we’re on the second line,” says a banker. That probably won’t be known for another couple of weeks, bankers say, but when it happens it will answer the other big question of bookrunner politics: has Credit Suisse got itself kicked off the deal?

Credit Suisse was the only one of the original AIA arranger group to be a joint global coordinator on Pru’s planned rights issue (the other JGCs on the Pru deal were HSBC and JP Morgan Cazenove). Credit Suisse also advised Pru on its bid for AIA. It remains to be seen whether AIA considers Credit Suisse’s actions disloyal or simply pragmatic investment banking that warrants no penalty.

As for the deal itself, AIG said last week it will go ahead with an IPO for its wholly owned life insurance business (that is, AIA) “as soon as practicable” in Hong Kong. Market talk expects it to raise between $10 and $15 billion, probably in the fourth quarter.

The other closely watched mandates of the week were on China Construction Bank’s potentially significant rights issue, which may raise as much as RMB75 billion. A report this week that Bank of America Merrill Lynch, Credit Suisse and Morgan Stanley will be the international leads on the rights issue has been confirmed by people close to the situation, while CCB International, CICC and Citic Securities are believed to be the domestic banks. Since CCB has a far higher outstanding float of H-shares than A-shares, the international side is expected to be much the larger part of the deal. The international names all have history with CCB: Morgan Stanley co-founded CICC with it; Credit Suisse was on its IPO (as was Morgan); and BAML, through Bank of America, is a major shareholder.

The CCB news, on top of the Agricultural Bank of China IPO and confirmed rights issues for Bank of China and ICBC, will add to concern about an overflow of Chinese bank liquidity into the market at a time when the Chinese stock market has already endured a miserable year. But those close to the industry think concerns are overdone.

“People who think it through will understand it’s not all coming at once,” says one banker. “The chosen approach has flipped from block trades to rights issues because Central Huijin wants to take up its entitlement.” Central Huijin is a state enterprise, part of China Investment Corporation, that holds stakes in China’s domestic banks. “When you think that Huijin holds 60-70% of Chinese banks and will take up its share of the rights issues, all those deals will therefore become 60-70% smaller.” [In fact, in CCB’s case, Central Huijin holds 48.23%.] Besides, only CCB has a larger volume of H shares than A shares. “There’s never really been a question of a flood, and if there was, China Inc turns up to buy this stuff anyway,” says a banker.

Recent Chinese rights issues, for China Merchants Bank and Bank of Communications, showed little evidence of flagging interest, which is positive for CCB. Elsewhere in Chinese banking, China Everbright Bank is expected to launch an A-share IPO in the next week or so, with CICC, China Jianyin Securities and Shenyin Wangguo Securities lead arranging.

Senior bankers have been in London and India over the last week attending bakeoffs and related meetings for Vodafone Essar. “A cast of thousands got invited,” says one banker who was involved. The company is believed to be planning an Indian IPO, which could potentially raise up to US$1 billion, as well as other financing arrangements. This will occupy a rather distant point in the IPO pipeline: those bidding expect no launch before 2011. In the meantime, the landmark IPO will be for Malaysia’s Petronas, which is listing its petrochemical business in a deal worth US$3 billion through Deutsche, Morgan Stanley and CIMB.

In terms of deals actually reaching the finish line, a few significant transactions did get away this week. China Agri-Industries Holdings raised US$600 million, US$400 million of it through a Hong Kong dollar-denominated five year-put-three convertible, and US$200 million through an accelerated placement. JP Morgan and Morgan Stanley led the deal, which (on the CB) paid a coupon of 1%, a yield to put of 2%, and had a conversion premium of 30% over the price of the placement.

The deal has been greeted as a potential catalyst for the reopening of the Asian convertible bond market, particularly because it was upsized from US$300 million. However it also drew some mild flak. “I thought it was pretty cheap actually,” said one banker. “It’s the first convert for three months. Still, you’ve got to price this stuff with a hook on it for people to show any interest, whether IPOs, blocks or converts.” Bankers report a few potential convertibles but bemoan the fact that expectations of premiums are sometimes unrealistically high. “It’s a case of: can we get expectations in line?”

Another well-received deal came from India’s Adani Enterprises, which raised US$850 million in an upsized qualified institutional placement, or QIP. Adani is part of a powerful Indian conglomerate active in coal, oil and gas, power, agro-processing and real estate, among other things; a good mix for investors, it seems. “People are looking for domestic growth stories out of India and China, and Adani was a good way to play that,” says someone close to the deal. He says the deal, which was upsized from US$600 million, was “very well received from domestic and international accounts, and had everything from long only to hedge funds to domestic India, existing shareholders and new ones. Normally in India you go out and build a shadow anchor-book; this was covered from anchor meetings before we even started.” More than a billion dollars of demand was committed.

A sizable arranger list enjoyed the deal: Bank of America Merrill Lynch, Citi, Enam Securities, ICICI Securities , IDFC Capital, Kotak Mahindra, Morgan Stanley and UBS.

Elsewhere, Khazanah Nasional, Malaysia’s closest equivalent to a sovereign wealth fund, sold a 5% stake in Telekom Malaysia through a block trade on July 20 – the fourth time it had sold down one of its many portfolio companies in 12 months. The trade raised M$581.3 million through Maybank and Nomura, and further similar selldowns of state holdings are expected as Malaysia looks to increase the free float of its major stocks.

Looking ahead, a few interesting deals are on the horizon. Garuda, a vital part of Indonesia’s planned reform of its state-owned enterprises, is supposedly still on track for an IPO in December and has sent out RFPs to domestic banks; China’s Rongsheng Heavy Industries, a shipbuilder, plans an IPO in Hong Kong; and Mapletree Industrial Trust is expected to raise as much as S$1 billion in a Singapore IPO. Mapletree is wholly owned by Singapore’s state investment arm Temasek, pretty much guaranteeing a warm reception locally.