It turned into a busy Easter for equity capital markets bankers in Asia as Agricultural Bank of China suddenly set the ball rolling for its upcoming initial public offering, which will include both Chinese-listed A-shares and Hong Kong-listed H-shares. Late on Friday the Chinese lender sent out a 35-page request for proposals (RFP), and asked banks that are interested in a role on its IPO to send them back by today. And, according to sources, a schedule has already been drawn up for the pitches, which will also start today.
The deal has been talked about for at least three years and the process was generally expected to kick off in the second quarter, but the fact that it all happened so quickly -- and over a Western holiday as well -- took most banks by surprise.
However, this certainly didn't mean there was any less interest. Sources say 21 banks are fighting for a role on the H-share portion of the deal with another 10 or so banks going for the A-share tranche. Western banks with a licence to underwrite A-share offerings -- Credit Suisse, Deutsche Bank, Goldman Sachs and UBS -- are expected to try to get mandated for both tranches. China International Capital Corp (CICC) and Citic Securities are believed to be almost certain to clinch two of the A-share mandates, having played a key role in advising the bank on the preparatory work that has made the IPO possible.
The massive interest among the foreign investment banks is not surprising, given the size of the offering. Details are still sketchy, but bankers familiar with the RFP process say it is likely that Agricultural Bank will attempt an IPO that is at least the size of Industrial Bank of China's record $21.9 billion offering in October 2006. One banker noted that "being the biggest ever is kind of a Holy Grail in China" and, if it can, it will try to achieve that.
Agricultural Bank is China's third largest bank by assets -- its latest available results show it had total assets of Rmb7.014 trillion at the end of 2008 ($1.03 trillion at today's exchange rates) -- and the last among the Big Four state-owned banks to go public. Historically, the bank, which has more than 350 million customers, has been considered weaker and more vulnerable than its peers because a lot of state-directed lending to less solid corporations in rural China. However, that has gradually changed over the past few years as the bank has been cleaning up its balance sheet and reducing its exposure to dodgy loans. That said, at the end of 2008 its non-performing loan ratio was still at 4.3%, while its capital adequacy ratio was 9.4%.
Expectations are that Agricultural Bank will grow at a quicker pace than its Big Four peers over the next few years, however, thanks to its focus on the fast-growing rural communities. It is also seen to be a major beneficiary from the ongoing urbanisation which according to China's National Statistics Bureau, is seeing as many as 20 million people move from rural areas to cities every year.
It is still unclear when the IPO will happen. Some bankers say the fourth quarter this year is the most likely, which would be in line with earlier expectations. However, some people speculated over the weekend that Agricultural Bank may try to push out a deal even before the summer -- say in June or July -- which may explain the rush in getting bankers to return the RFPs over a long weekend. The Hong Kong market was closed last Friday, as well as Monday and Tuesday this week, while China had a holiday on Monday.
It is also not known how the upcoming deal will be divided between A- and H-shares. Initially it was expected that the H-share portion would be larger, but bankers now suggest that the deal may be split in two equal portions. About five banks are expected to be mandated on each portion, which for the H-share portion at least would be in line with ICBC's IPO.
Even with that many banks involved, the total fees are expected to be substantial. Applying the 2.5% fee that ICBC paid three-and-a-half years ago to a $25 billion deal would result in a $625 million payment to the arranging banks. However, fees are expected to come down compared with those paid by ICBC, partly because there have now been quite a few other Chinese banks that have listed and partly because of the competition to get in on the action. In fact, the 35-page RFP noted that banks that submit a pitch with fees that don't cover their costs will not be considered for a mandate. Still, even if the fee was to end up at 1.5%, it would result in a sizeable revenue pie of $375 million.
Agricultural Bank's IPO preparations come at a time when there is supposedly a lot of interest among global investors, especially hedge funds, to increase their equity exposure to Asia. According to market observers they are still underweight China, which has underperformed global markets over the past 18-20 months, and big liquidity situations like Agricultural Bank's IPO are a good way to add to their holdings without risking to move the market. With lingering uncertainties about the short- to medium-term outlook for equities, many investors also prefer to stick close to the large index plays, of which Agricultural Bank is (in due course) expected to be one.
The RFPs follow Agricultural Bank's IPO preparations come on the back of a record first quarter in the Asia ex-Japan ECM market with $40.9 billion worth of transactions, according to preliminary data provided by Dealogic. This is up from $23.4 billion in the first quarter 2009 and $38 billion in the first quarter of 2007 (which ended up being a record year for the Asian primary markets).
IPOs have accounted for $19.9 billion of the issuance so far this year, partly thanks to Russian aluminium giant Rusal's $2.24 billion listing in late January and Korea Life Insurance's $1.56 billion listing in March. The second quarter is expected to open on a strong note too, with Samsung Life having announced last week that it intends to raise between $3.5 billion and $4.5 billion from an IPO that will kick off in earnest now that the holidays are out of the way. If successful, this will be the largest ever IPO in Korea. Other large deals expected in the next few months include Swire Properties, a spin-off from Hong Kong-listed property and retail conglomerate Swire Pacific, which may raise in the range of $2 billion to $3 billion, and the possible resurrection of Australia-based mining company Resourcehouse, which could raise another $2 billion to $3 billion.
A couple of wind power companies and Oleg Deripaska's power unit OAO EuroSibEnergo are also part of a slew of potential issuers that could raise at least $1 billion.
The 21 banks pitching for the H-share portion of the IPO will meet with Agricultural Bank today, followed by the banks pitching for the A-share portion tomorrow.
Photo provided by AFP.