Euroweek equity roundup, July 30

Euroweek – Equity Capital Markets round-up, July 30 2010

SKS moves towards listing 

The busiest IPO activity in a quiet week was for SKS Microfinance, which should conclude its bookbuilding today [Friday]. The likely Rs16.54 billion (US$354 million) listing is the first float of a microfinance institution in India.

IPOs in India typically start with the formation of a book of anchor investors, and SKS completed this part of the process on Tuesday, selling 18% of the float to around 20 such anchor names including the sovereign wealth fund Abu Dhabi Investment Authority, JP Morgan, Morgan Stanley, Sundaram BNP Paribas, ICICI Prudential, Reliance Capital and Birla Sun Life. Many of these are assumed to be investing on behalf of clients.

The anchor names came in at the top of the Rs850-985 indicated price range; the mooted Rs16.54 billion figure for the total listing assumes that general investors come in at the same level. As of Thursday night, that looked likely. “The response has been generally very positive,” says someone close to the deal. “The anchor tranche was multiple times oversubscribed on Tuesday and the demand is spilling into the regular book.” 60% of the 16.792 million shares on offer will go to qualified institutional buyers (QIBs), a category that includes the anchor investors; 30% is targeted for retail and 10% to non-institutional investors, which mainly refers to high net worth buyers. The formal listing should take place around August 16 and the deal is being lead managed by Citi, Credit Suisse and Kotak Mahindra.

Asked about the reason for the popularity, the person said: “It’s one of the first microfinance companies to list in India and it is showing significant growth. It’s also the asset quality, in terms of how it structures its loans. So many people in India are looking for this type of microfinance.” Microfinance, involving small loans to people too poor or lacking in assets to gain lending from mainstream institutions, tends to have surprisingly low default rates and has started to attract the attention of big western investors: George Soros’s Quantum Fund, which is already a shareholder, is another of the big names in the anchor tranche. SKS is India’s largest microfinance name measured by outstanding loans (Rs29.4 billion as of March 31) and number of borrowers, or members (6.7 million, served by 2000 branches in 19 states).

Block trades for Hynix and Mengniu

Two successful placements were completed in Asia this week, for stock in Korea’s Hynix Semiconductor, and for the Chinese milk manufacturer China Mengniu.

On Monday night nine Hynix Semiconductor creditors sold a combined 4.1% stake in the Korean memory chip company, raising W584.5 billion (US$492.8 million) in a sale arranged by Credit Suisse, Nomura Securities, Shinhan Investment and Woori Investment & Securities.

The choice of arrangers was no surprise as it was the same group that arranged a sale of a 6.7% stake for the same creditors in March; rival bankers say there was no new invitation to pitch.

The sale was significant for both Hynix itself and its investor base, as it removes a troublesome overhang in the stock. The creditors still hold 16.5% after the latest sale, but Korea Exchange Bank – which leads the creditor group – has said it will make no further sell-downs in the market, with the remainder going in a trade sale when the time is right. The term sheet of the placement only refers to a three-month lock-up for creditors, so technically there is nothing to stop them selling in the market again, but everything points towards M&A and a strategic buyer.

The placement was well received, selling at the market rate rather than a discount – just as was the case in the March sale. The end of the overhang is expected to be positive for Hynix’s own share price in the near term: the creditors, who first came into the company’s register in 2001 as part of a debt to equity swap as Hynix flirted with bankruptcy, having been selling periodically since 2005. After the March sale, the stock rallied 25% in a month before sliding back to where it started.

All told, 24.406 million shares were sold in the latest placement at W23,950 per share – Monday night’s closing price. This was the top of a W23,200-W23,950 range, and marginally higher than the March sale, but still the creditors could have gained more than W4,000 more per share had they sold a month earlier.

The full list of creditor sellers is KEB, Daewoo Securities, Korea Finance Corp, Korea Restructuring and Collection Corp, National Agricultural Cooperative Foundation, Shinhan Bank, BNP, Woori Bank and Woori Investment & Securities.

The China Mengniu sell-down was made by two major shareholders, Jinniu Milk Industry and Yinniu Milk Industry, which are vehicles holding shares owned by the company’s senior management, employees and partner businesses. Between them the two vehicles sold HK$1.21 billion ($156 million) in stock.

China Mengniu is regrettably best known for the wrong reasons these days, after being involved in a scandal when melanine was discovered to have been added to milk, killing four babies and hospitalizing thousands in 2008. The two shareholders have sold down stock on four occasions prior to this week’s sale, but this was the first they had done so since that scandal broke. It could be argued the sale demonstrates that investors are happy the industry has moved on and changed practices. Indeed, the China Mengniu share price is higher today than it was then, in stark contrast to Singapore-listed China Milk, which was exonerated of any involvement in the milk scandal but has had its shares suspended for months after defaulting on a convertible bond and failing to produce its accounts.

The trade, of 50.696 million shares, was sold with an indicative price range of HK$23.75 to HK$24.15, and sold at HK$23.95 per share, a 3.8% discount to the closing price. Lead managed by BNP Paribas, the deal sold to around 50 accounts including some anchor investors. It was not clear whether Cofco and Hopu Investments, strategic investors who bought in to the company in June and have helped to restore its reputation, were among the buyers.

Round-up – In the pipeline:

In a quiet week for issuance, and no major bake-offs since last week’s Vodafone Essar pitches, bankers are mainly looking ahead. “What’s keeping us busy is preparing more of the stuff that’s due to launch end-August, early-September,” says one head of syndicate. He expects to see more block trades following the China Mengniu and Hynix deals, conducted opportunistically.

One of the bigger deals in the pipeline is ICBC’s rights issue, for which the terms were announced in a Shanghai filing on Wednesday. This will be a 0.6-for-10 rights issue which suggests a potential raising of RMB45 billion (US$6.64 billion). It will take place in Hong Kong (up to 5 billion shares) and Shanghai (15 billion), through UBS and BNP Paribas. However, the deal still has to be approved by regulators, making any precise timetable difficult to predict. It will have to navigate its way through a market that will also be trying to digest rights issues from Bank of China and China Commercial Bank, among others.

Bankers were also interested to learn that ICBC plans to privatize its ICBC (Asia) unit, though it has provided no further details. Since Bank of China already has a listed unit in Hong Kong (Bank of China HK, which has actually been listed in Hong Kong longer than the parent has), some bankers suspect a new trend of mainland banks listing overseas operations.

The ICBC rights issue will have a bigger impact on the A share than H share market, and Shanghai remains the place where much of the action is. Also this week, the China Securities Regulatory Commission approved the IPO of China Everbright Bank, which will raise up to RMB20 billion in an A-share listing.  CICC, Shenyin & Wanguo Securities and China Jianyin Investment Securities are mandated on the deal. Another large Shanghai IPO, a RMB3.2 billion listing for the military uniform contractor Jihua Group, entered bookbuild this week with UBS Securities on its own at the helm.

Smaller Chinese names are looking elsewhere. China Kanghui, a medical devices manufacturer, started bookbuilding this week for an approximately US$75 million listing on the New York Stock Exchange. Kanghui, which specializes in orthopedic implants, is marketing in a price range of US$9.25 to 11.25 per American Depository Share and will offer 1.335 million ADSs. Morgan Stanley, Piper Jaffray and Canaccord Genuity are lead managers on the deal, which should price around August 10.

Morgan Stanley is taking another Asian name to America: the Indian online travel services company MakeMyTrip, which will raise up to US$100 million in a Nasdaq listing. This deal launches today and is expected to price on August 11.

Back in Asia, the Indonesian coal producer Berau Coal is today in the middle of a roadshow for an IPO of Rp900 billion (US$99.9 million) to 1.2 trillion (US$133.2 million). This is much less than a US$300 million figure that had been referred to previously, following a successful sale of high yield bonds earlier this month. The price will be determined next week and the stock should start trading on August 19. Credit Suisse, JP Morgan, Danatama Makmur and Recapital – a subsidiary of Renaissance Capital – are joint bookrunners on the deal.

And in India, numerous deals are lining up. Pitches are being considered for a follow-on deal from Power Grid Corp, reported as likely to raise up to US$1.8 billion; so too for an IPO of Manganese Ore, which could raise up to Rs12 billion. Shortlisted bookrunners, including internationals Deutsche, Goldman Sachs, JP Morgan and UBS, were understood to be presenting this week.