Bank of China: Asia's largest ever secondary offering from banking sector

Parent surprises market with the sale of a 10.2% stake in its Hong Kong listed affiliate.

Bank of China took advantage of the incredible momentum propelling Hong Kong equity markets with the sale of an increased 1.07 billion share stake in Bank of China Hong Kong on Monday raising $1.89 billion. The sheer speed with which orders came flooding in surprised even the leads and led to a change in the syndication process just over an hour after it had begun.

Lead managers BOCI, Goldman Sachs and UBS initially told accounts they would allocate an 868 million share deal for the first four hours on a first come first served basis and at a fixed price of HK$13.70. At the same time they would also build a second order book for those investors that did not want to be allocated in full up front and this would stay open until New York's trading day.

However, after just an hour and fifteen minutes, the entire offering had been swallowed whole by Asia leaving nothing for Europe and the US. Allocating the deal of this basis would have been a disappointment for Bank of China Hong Kong, since it was looking to use the offering to diversify its investor base.

As a result, the parent made further stock available, increasing the deal size by 23%. In the meantime, the leads had closed the allocate-as-you-go order book at 11.45am and shut the second order book at 2pm. This was then re-opened at 4pm and closed again at 9pm, two times oversubscribed.

But given there was only about $350 million additional stock to play with, many of the Asian accounts which had chosen to enter bookbuilding had to be frozen out of the allocation process in order to give increased weighting to Europe and the US. Rough final splits are said to show that about 60% went to Asia (predominantly Hong Kong) and roughly 20% each to Europe and the US.

A total of 370 orders were counted, of which 132 comprised investors allocated before 11.45am. Many of the initial orders are said to have been large, with five investors asking for more than $100 million and 10 for more than $50 million.

By investor type, all of the second tranche of shares went to institutional accounts, while the first had a split which saw about 45% allocated to corporates and private banking clients, 35% to institutions and 20% to hedge funds.

Observers cite the high percentage of corporate and private banking accounts as one of the main reasons why the transaction worked and was so cleverly timed. On a superficial level, a deal of such a large size and so late in the year faced a number of challenges, which those now thinking of following may not be able to overcome.

Recent placements from Hong Kong have not been uniformly successful. If investors sense they are being heavily diluted after strong share price appreciation, aftermarket performance can be messy. Many players also believe that institutional investors have closed their books earlier than normal this year to protect existing gains after a spectacular run. Adding to the leads' problem, a lot of liquidity has been sucked out of the market by IPO's for Great Wall Auto and China Life.

But two very important aspects made this offering different. Firstly, there was no dilution. The parent also had a very clear use of proceeds - bolstering its capital ahead of its own IPO.

Secondly, the leads judged that the bedrock of demand would come from local rather than international or institutional investors. Local investors have not only been the bank's main supporters since it listed in July 2002, but have also been the driving force of recent IPO's to record high oversubscription levels. Catching this wave of buying interest rather than waiting until January and potentially sinking under the weight of such a huge offering size was therefore a very smart move.

At HK$13.70, the deal was priced at a 12.2% discount to the stock's close on Friday and represented a hefty 38 days trading volume. When it resumed trading yesterday, it suffered its largest one day fall since listing, dropping 10% to close at HK$14. More importantly, however, it stayed above the offering price.

Pre-offering only about $1.5 billion of the company's $5 billion freefloat was held by institutional accounts. The new deal means this has nearly doubled, enabling Bank of China to achieve one of its strategic aims. Eight of the 10 largest long-only accounts in Asia, for example, are said to have participated.

Year-to-date the stock is up 95% and has heavily outperformed both Hang Seng Bank and Bank of East Asia. Such outperformance has in part been driven by Bank of China's greater exposure to the property sector and China, where it hopes to increase revenue from 2% to 10% over the next three to five years. But at roughly 2.5 times price to 2003 book, many analysts think it is now fully valued.

The parent will be unable to sell further stock for six months and has indicated that it has no desire to sell any more for a further six months after this. Its stake drops to roughly 66%.

In the space of one week, Asia has now recorded its two largest equity deals of the year outside of Japan. In one swoop, Bank of China becomes Asia's largest follow-on offering in over a year, the largest ever secondary offering from the Asian FIG sector and the second largest FIG offering of any kind since the bank's own IPO in July 2002.