Regional BEST SOVEREIGN / QUASI-SOVEREIGN BOND Hong Kong SAR Government HK$20 billion five-tranche bond Global coordinators: BOC Group, HSBC, Merrill Lynch Additional bookrunners: Citigroup, Goldman Sachs, Morgan Stanley ,Standard Chartered WHEN THE HONG KONG government announced that it wanted to raise HK$20 billion (US$2.57 billion) through a bond programme that would include a US dollar tranche, market anticipation quickly reached fever pitch. But the potentially positive publicity quickly turned into criticism as a bloated and farcical selection process for the programme's bookrunners resulted in BOC Group and Merrill Lynch surprising everyone by gaining the mandate, only for them to publicly request the government to include HSBC, which is by far the biggest arranger of Hong Kong domestic and international deals. While the mandate process was badly handled, the transaction itself was not. It was a professional piece of funding for a debut borrower that involved the virtually simultaneous pricing of a US dollar bond and four tranches of institutional and retail-investor-targeted Hong Kong dollar bonds. Investors praised the SAR government and the joint bookrunners for taking a complicated funding plan and both marketing and executing it professionally, without any hitches. The novelty of the name, which is somewhere between a municipality and a sovereign and combines a transparent business environment with links to China, helped the international deal gain more than US$5 billion in orders. Meanwhile, the domestic tranches were also quickly sold as domestic investors hurried to take advantage of the first domestic-currency government bonds to launch in more than 10 years. The pricing of the issue was reasonable, with the US dollar bond pricing at 74 basis points (bps) over Treasuries, about 5bps inside China's interpolated US dollar bond curve. And it has not looked back since, continuing to trade inwards to a bid/offer spread of 55/51bps over by early December. The institutional and retail tranches were also priced largely in line with each other and at the tight end of spread guidance. The uniqueness and complexity of Hong Kong's bond just beat out China's € billion (US$1.33 billion) 2014 bond, which marked the first time an Asian sovereign has raised 10-year funding in euro-denominated bonds and was extremely well distributed. Special mention should also go to Pakistan, which wooed investors with a US$500 million five-year bond in February that quickly traded inwards, while Indonesia returned to the market with a successful US$1 billion 10-year deal in March. BEST INVESTMENT-GRADE BOND Telekom Malaysia US$500 million 5.25% 2014 bond CIMB, Deutsche Bank, UBS WITH GOVERNMENT PARTIAL ownership and a well-run and highly respected business model under relatively new management, Telekom Malaysia was already considered to be one of Malaysia's premier names. But the joint bookrunners could not have picked better timing when they arranged a US$500 million bond in September. Two days before its launch Moody's issued an unprecedented two-notch credit-rating upgrade, increasing the bond's rating from Baa2 to A3, a notch through the sovereign ceiling. Bankers at the joint bookrunners claim some credit for the upgrade, citing the fact that they worked with Telekom Malaysia and Moody's in an effort to get them upgraded, and even delayed the launch of the transaction slightly until Moody's could announce the results. Even so, the two-notch lift caught the entire market by surprise. Telekom Malaysia, already a strong company, gained even better momentum, quickly garnering US$10 billion in bond orders to leave the order book around 20 times oversubscribed. Before the issue, soft-pricing talk had placed the potential spread in the high teens over 100bps, but the momentum ensured that the transaction ended up pricing at 112bps over US Treasuries. At this level, the issue was priced through the interpolated debt curve of Petronas, long considered the sovereign proxy, while the 5.25% coupon was the lowest paid by a Malaysian company since the 1997 Asian financial crisis. The success of the bond and Moody's decision to upgrade Petronas by one notch to A3 shortly after have since propelled investor interest for all Malaysian credits and caused the country's entire bond market to tighten. Telekom Malaysia's bond has continued to perform extremely well even as the entire Asian bond market tightened inwards, trading at a bid/offer spread of 89/84bps over by early December. BEST HIGH-YIELD BOND Sino-Forest Corp. US$300 million 9.125% 2011 bond Morgan Stanley GIVEN THE SHUDDERS that used to envelop most Asian investors when putting the words Asia, pulp and paper together, the ability of the Toronto Stock Exchange-listed Sino-Forest to launch a US$300 million seven-year bond to huge investor interest was truly remarkable. Critics of the issue point to a generous coupon level and the deal's rocketing aftermarket performance – since pricing, the bonds tightened to a cash price of about 106 by mid-November. In hindsight, these criticisms do have some truth to them. Less convincing are claims that Sino-Forest is not an Asian company. While the company is listed in Canada, it is headquartered in Hong Kong and all of its assets are in China. Investors are obviously thrilled at the bond's yield and performance, but they are quick to point out that, at the time of launch, the company was a debut borrower with all its assets in a sector that had not been covered in good news. There were questions about how easily Sino-Forest could cover the coupon payments when all its assets were in a country not best known for regulatory and legal transparency. Hence, they argue, a fairly substantial yield was required. The company's management in the roadshow impressed many investors with a concise and informed message. And the company also took the bold step of launching the bond in early August – a time virtually unheard of for launching Asian bonds, let alone high-yield debut transactions – in order to catch a suddenly resurging international interest in high-yield bonds. The strategy meant that the bond's order book was US$980 million, allowing Sino-Forest to increase the deal's size from US$200 million. The success of the bond and its tremendously strong aftermarket performance has since opened the door to further high-yield deals. Panva Gas, another China high-yield name, was able to price its own US$200 million 8.25% 2011 bond in September to very strong market acclaim. The rapid growth of China's economy suggests that more of these high-yield borrowers could launch bonds in the months to come. Other high-yield deals that impressed include LG Telecom's US$200 million 8.25% 2009 bond, though at the time of pricing in July it struggled due to tough secondary market conditions. STATS ChiPAC, the Singapore based and partially Temasek-owned semiconductor manufacturer, also took advantage of US high-yield investor demand to conduct a highly successful US$215 million 6.75% 2011 bond issue in November. BEST LOCAL-CURRENCY BOND Cagamas MYR1.56 billion (US$410.56 million) multi-tranche RMBS bond Aseambankers, CIMB, Standard Chartered MALAYSIA'S INTERNATIONAL AND domestic bond markets were ablaze during 2004, with a welter of impressive deals catching investor support. But perhaps the most noteworthy in terms of genuine market development was Cagamas' RMBS bond, the first time that a mortgage-backed deal has ever been done in the country. Cagamas, which is Malaysia's mortgage-finance agency and a regular borrower in the vanilla debt market, bought a MYR1.936 billion collection of mortgage loans from Bahagian Pinjaman Perumahan, the government's housing-loan division. This helped to drop the government's budget deficit and offer both domestic and international investors a first MBS deal at the same time. Because the deal was a trailblazer it required a lot more regulatory and legal work than most ABS issues, including changes having to be made to the housing-loan law to allow the underlying assets to be sold. But because the loans are repaid by direct debit, defaults and losses are almost non-existent, which gave investors a feeling of security. This showed in the level of demand, with an order book of MYR11.1 billion being generated at initial pricing guidance, MYR2.2 billion of which was from international investors. Cagamas' deal did a very good job as a high-flying debutante in Malaysia's mortgage-backed securities market. The government has already indicated that it wants to sell MYR24 billion of civil service mortgages to Cagamas next, and more government-linked MBS issuance is intended throughout 2005. The key feature will be to see whether the issue's success will shake out MBS bonds based on private-sector mortgages. Other notable domestic-currency bonds included the Asian Development Bank's debuts in both rupees and ringgit. The rupee bond is a Rs5 billion (US$114.08 million) 5.4% 10-year bond that marks the first time a non-Indian borrower has entered the market. The ringgit bond is a MYR400 million 3.94% five-year issue that once again marked the first international borrower's arrival in the country's domestic bond market, while Housing Development Finance Corp. priced a Rs10 billion 5.85% 2009 bond and swapped the coupon payments into US dollars. BEST IPO Tata Consultancy Services US$1.022 billion DSP Merrill Lynch, JM Morgan Stanley, JPMorgan WHEN IT DECIDED to go public this year, Tata Consultancy Services did so in style. The TCS offering was the largest-ever out of India, and included participation by 1.25 million retail investors. It offered investors the opportunity to cash in on the Indian growth story by buying into one of the most well-respected companies there. But taking TCS public was no easy task. It took more than three years to complete the process, thanks to the heavy burden of complicated regulatory issues. The company had to change its tax structure and transfer assets from Tata Sons, the TCS controlling shareholder. There was also the difficult task of selling 35%-45% of the offering to retail investors, as required by local regulators. The share-price range was set at Rs775-900 (US$17.68-20.53), with a final pricing at Rs850. Of the 55.5 million shares, 54% were sold to domestic and international institutions and 36% to domestic retail clients, while 10% was allocated to employees. The offering reduced Tata Sons' holdings in TCS to 82.7% from 90%. Not only was the execution of the deal a resounding success, the stock has proved to be a hot ticket for both Indian and international investors. The stock is up 25% from its launch in mid-August. TCS has earned recognition as the best IPO in Asia because it not only navigated difficult market conditions and increasing political risk in India, it also set a new benchmark for the size and success of an IPO that can happen in India. Although the TCS deal is a clear winner as best IPO in Asia, there were other notable deals in 2004. In Korea, LG Philips LCD managed to execute a difficult yet substantial US$1.059 billion IPO amid market volatility and became the first Korean company to list concurrently on Korean and US stock exchanges. While the initial pricing and execution of the deal was difficult, thanks to a swift downturn in the market around the time of pricing, the company's long-term value shone through in the end. The deal required a great deal of regulatory manoeuvring to get the duel listing off the ground. UBS, Morgan Stanley and LG Investment Securities acted as lead bookrunners. Also, Ping An Insurance Group, the Chinese insurance company, came to the markets with a well executed US$1.84 billion IPO. BOCI, Goldman Sachs, HSBC and Morgan Stanley acted as bookrunners. BEST EQUITY-LINKED DEAL AND BEST DEAL IN SINGAPORE Temasek/Singapore Telecom US$1.37 billion equity placement and exchangeable bond Merrill Lynch TEMASEK PULLED off the largest equity and equity-linked deal to come out of Singapore in the last few years with its US$1.37 billion equity placement and exchangeable bond offering in January. The deal included a S$1.358 billion exchangeable bond (US$800 million) and S$764 million share offering. After three years of wrangling with regulatory and other bureaucratic issues facing the government-owned telecoms company, singtel, the parties involved finally managed to raise US$1.37 billion in just 12 hours after the deal was approved. But the deal was not just an exercise in capital raising. Agreement was reached thanks to the free-trade agreement that was signed between the US and Singapore in 2000, which required the government to reduce its stakes in telecommunications. The transaction reduced Temasek's stake in Singapore Telecom from 67.18% to 64.98%. This will be reduced further to 61.49% after the bonds are fully converted. Also by offering equity to its Australian shareholders, the deal increased SingTel's liquidity in the Australian stockmarket. The stock was fairly illiquid and the company wanted to boost its free float. Around US$150 million of the US$450 million flowed into the Australian market. The bond priced at 100, with a conversion premium of 29% and an issuer call option of 120% and investor put option after two years of 99.80%. The bonds, which have a 15% green shoe, traded up to 101.375 after the transaction. BEST LOAN Eastern Multimedia Company US$414 million loan ABN Amro, ANZ, ChinaTrust, First Commercial, SG, WestLB WHEN EASTERN MULTIMEDIA Company (EMC), a Taiwanese cable-TV operator, needed to clean up its debt profile and consolidate several loans into one borrowing, a group of six banks came up with one of the most highly structured loan deals of the year. The NT$$ 13.8 billion (US$414 million) dual-currency refinancing was the largest-ever debt financing in the media industry for Asia ex-Japan. It brought in 23 local and foreign banks on the syndication and attained an unusually long tenor for this type of deal. All in all, the structure and the results are impressive. EMC, which was looking to improve its balance sheet for a future share offering, signed up for a seven-year loan. The company carried large off-balance-sheet liabilities, which the bank required to be brought forward and cleaned up in order to syndicate the loan. But thanks to complicated ownership, structuring the loan was challenging. EMC's ownership is fragmented and includes major shareholders and more than 8,000 individual investors, with the largest shareholder holding 20%. Bankers created a holding company so that lenders could have security over the company's shares and assets. The capital was lent to EMC, with the holding company acting as guarantor. EMC had made several loans to EMC-affiliated companies, as well as non-group companies—many of which were guaranteed by EMC. These guarantees and liabilities needed to be removed before the financing could be approved. A ring-fencing structure was included, which provided two levels of security for the lenders. First, an account was set up with a securities agent where all the revenues from EMC and its affiliated companies are deposited. This allows the lenders to control how cash generated by the company is used by the different entities of the group. Second, a reserve account was set up which covers debt service obligation for six months. Apart from the seven-year financing, the loan included an eight-year US$50 million tranche, which was designed for and sold to a Taiwanese bank. Lenders also designed a hedging program that inlcuded a US$237 million foreign currency and interest rate swap and a NT$5.9 billion interest rate swap. BEST M&A Citigroup's acquisition of Koram Bank. US$2.73 billion Sellside Advisor: Goldman Sachs, JP Morgan Buyside Advisor: Citigroup THE ACQUISITION OF Koram Bank, the sixth-largest bank in Korea, led an exceptionally strong field of contenders for best mergers and acquisitions deal. Goldman Sachs advised Bank of Communications on its recapitalization and the eventual purchase of 20% by HSBC. The three-way merger of Thai Military Bank with DBS Thai Danu Bank and IFTC was a highly complex and ground-breaking deal, and Anheuser Busch bid to acquire Harbin Brewery, the country's first hostile-takeover battle. But the Koram acquisition takes the prize. It was an industry-changing event in Korea. It was the largest foreign investment ever in the country and it triggered a new wave of foreign interest in the industry. Now HSBC is looking closely at Korea First Bank and US-based Lone Star is said to be talking to possible suitors for its stake in Korea Exchange Bank. Koram's newly acquired expertise from Citigroup will force other banks in Korea to upgrade their risk controls, credit analysis and profitability. And Korean banks also fear Citigroup's expertise in wealth management. Despite two official rate cuts in Korea in the past three months, several Korean banks recently matched Koram's interest-rate increase on term deposits. Citigroup had originally advised Carlyle and JPMorgan Corsair to buy a 36.6% stake in Koram in 2000. It agreed in February 2004 to buy the consortium's stake, and launched a bid for the remaining Koram shares, 7% above the monthly average price so as to fend off interest in Koram from Standard Chartered and Temasek. The private-equity consortium had installed new management in Koram, many of whom had previously worked at Citigroup. BEST PROJECT FINANCE The Guangdong Dapeng LNG project US$897 million Financial Advisor: ABN AMRO ABN AMRO EMERGED as the winner for the best project-finance deal against extremely tough competition from Deutsche Bank's project financing of the Optimal group of Malaysia's integrated petrochemical plant. The deal involved US$269 million in equity, a debt facility of Rmb5.2 billion (US$630 million) based on a 70:30 debt-to-equity ratio, an 18-year Rmb2.8 billion loan and a 15-year US$219 million loan, and working capital of Rmb585 million available in renminbi and US dollars. The margin is 50bps over Libor for the US dollar portion and a 10% discount to the People's Bank of China rate for the renminbi portion. The Guangdong LNG deal was chosen because it is the first fully domestically funded, non-recourse project-finance deal in China. It was the most competitive non-recourse financing in China to date, and has the longest tenor at 18 years. It has set a precedent for a number of other LNG-project financings currently in the works in Fujian, Zhejiang and Tianjin, and it saw Chinese banks emerge as a potential new force in the project-finance business. CNOOC, China's third-largest energy company, and its chosen partner BP, which was the sole foreign participant in the project, appointed ABN Amro in 2001 as financial adviser to the Guangdong LNG pilot project. China's first new LNG-import terminal and trunk-line project, to be built in Chengtoujiao east of Shenzhen, will, by 2015, receive 20 million tonnes of gas a year. The move into LNG is being promoted at the highest levels of the Chinese government and the deal has approval from the State Council. The gas will be sourced from Australia's North West Shelf in a deal worth about US$20 billion over 25 years. The project has already secured long-term gas sale arrangements with off-takers, which are also green-field distribution companies that are being financed by the same banks financing the LNG project. One of the challenges in tying up the deal, according to Brian Little, ABN Amro's Asia head of structured capital markets, was to educate the syndicate of five Chinese banks about the risks of financing such a project. Four of the five PRC banks that were involved offered to take on the full underwriting – both the renminbi and US dollar portions – at better terms than the sponsors asked for. But the sponsors didn't want to rely on just one or two banks pricing below the market, and struck the deal in the mid-ranges because they may want to tap the same banks for funding of future LNG projects. Chinese banks are very keen to lend to large-scale international projects, and this pilot project is seen as a low-risk strategic project that the state does not want to fail. Moreover, the deal should be ringing warning bells for all so-called international project-finance banks. "Because Chinese banks are now able and willing to deal at the upper end of structured bank products, they will over time begin to aggressively displace the US dollar banks who do this business," says Little. BEST SECURITIZATION HK SAR Government's Hong Kong Link 2004 Ltd. HK$6 billion (US$771.8 million) securitization HSBC sole global coordinator, sole retail bookrunner, joint institutional bookrunner Citigroup joint institutional bookrunner. THE HONG KONG government's HK$6 billion securitization of tolled tunnels and bridges was a landmark as it was the first securitization of tolled facilities in Asia, excluding Japan and Australia. The deal was executed within a tight time frame of nine weeks, and was the first local securitization distributed simultaneously to retail and institutional investors, and the first to be listed on the Hong Kong Stock Exchange. The institutional tranche was four times oversubscribed and the retail tranche three times oversubscribed. Of the 64% sold to institutions, about one third went to other Asian but not Hong Kong-based institutions. The Hong Kong government wanted retail investors to participate in the deal and HSBC ran an extensive educational campaign to explain securitization throughout Hong Kong. There was no US dollar tranche because the government did not want a US-style disclosure process for its first foray into this sector. The Hong Kong government did not sell the toll assets and retains discretion in transport policies, including its ability to set tolls and manage the relationship with private operators. That, and the cost of the deal, led some to question the rationale behind the securitization. But HSBC argues that it has helped develop the securitization market in Hong Kong. And while it may be more expensive for the government to raise funds this way, compared to a government bond issue, the government also passed off some of the risk attached to changes to toll revenues that may result from an economic slowdown or lower traffic volumes. Country Awards BEST CHINA DEAL Sale of 19.9% stake in Bank of Communications to HSBC US$1.75 billion Sellside Advisor: Goldman Sachs Buyside Advisor: HSBC
December 01, 2004
