CCB mandates six for rights issue

Sources say Bank of America Merrill Lynch, Credit Suisse and Morgan Stanley will be involved in the rights issue which may raise up to $11 billion.

China Construction Bank (CCB) has, according to sources, mandated six banks to help arrange a rights issue that it has earlier said could raise up to Rmb75 billion ($11 billion) as the cash calls by the Chinese banks gather pace.

The selection of banks comes after Agricultural Bank of China successfully raised $19.2 billion from its initial public offering and Bank of China announced earlier this month that its up to Rmb60 billion ($8.8 billion) rights issue will be launched after a general meeting on August 20 -- assuming it gets shareholder approval to proceed.

The sources said the international banks involved in the CCB rights issue will be Bank of America Merrill Lynch (BAML), Credit Suisse and Morgan Stanley. They will be joined by domestic banks CCB International, China International Capital Corp (CICC) and Citic Securities.

There was no information which banks will arrange the H-share tranche and which will arrange the significantly smaller A-share tranche. However, the sources said CCB has indicated that Morgan Stanley, CCBI and CICC will take a leading role on the deal, although it wasn't clear whether that would mean that they will also formerly be named global coordinators.

It seems likely that there may be more banks involved in the H-share tranche, since it will account for 96.15% of the total deal -- as per the split between the outstanding A- and H-shares. Also, the H-share tranche will be fully underwritten by the arranging banks, while the A-share will not be underwritten.

In June, CCB said that its largest shareholder, state-owned holding company Central Huijin Investments, which owns 48.23%, will take up its entitlement in full, thus reducing the amount of shares that the banks will have to underwrite.

The international banks that have been chosen are no great surprise. Morgan Stanley has a long relationship with CCB, having jointly set up CICC as the first Sino-foreign investment bank back in 1995. CCB's stake in CICC has since been transferred to China Jianyin Investment, which is wholly owned by Huijin Investment. Morgan Stanley and Credit Suisse were also both involved in CCB's IPO in 2005, while BAML has a relationship with CCB through its ownership of 25.6 billion of CCB's H-shares, or 11.4% of the H-share capital. The investment dates back to before CCB's IPO and was originally made by Bank of America.

Meanwhile, CICC and Citic Securities are two of the largest domestic Chinese brokerages that are frequently called upon for large deals. And CCBI is of course the bank's own internationally focused investment banking arm.

There have been concerns that the massive capital-raising exercises among the Chinese banks this year would hamper the market -- including Agricultural Bank's massive IPO, their combined fund raising in the second half of 2010 could total as much as $50 billion -- and indeed the largest banks did underperform in the first half, while the Shanghai stockmarket is one of the worst performing markets in the world year-to-date. However, the fact that Bank of China (BOC) and Industrial and Commercial Bank of China (ICBC) have both decided to do a rights issue instead of a follow-on sale targeted at the wider investment community, have calmed most of those fears and allowed the bank stocks to recover some lost ground in the past six weeks. The shift towards rights issues is said to be prompted by the fact that the Chinese government doesn't want its shareholdings to be diluted.

Also, the rights issues completed already by China Merchants Bank and Bank of Communications (BoCom) have both attracted a lot of interest. BoCom said last Friday that the H-share portion of its $4.8 billion rights issue was 99.3% subscribed and attracted excess subscriptions for three times as many shares as were on offer. And in early April, China Merchants Bank received excess subscriptions for 3.3 times the amount of H-shares available through its $3.2 billion rights issue.

One banker said the steep discounts offered are likely the key reason for investor interest and said existing shareholders are likely putting in extra orders in the hope of increasing their shareholding at a good price. BoCom offered its rights shares at a 34.0% discount to the theoretical ex-rights price (Terp) and China Merchants Bank offered as much as a 46.1% discount to Terp for the H-share tranche.

Whether CCB will come at a similarly attractive discount remains to be seen, but the bank has already said that the price will be no more than Rmb4.50, or roughly HK$5.15. This compares with a current share price in Hong Kong of HK$6.26.

The bank will offer 0.7 rights share for every 10 existing A- and H-shares, according to a stock exchange filing in late April. Under the plan, approximately 16.36 billion new shares will be issued, of which 15.7 billion will be Hong Kong-listed H-shares directed to overseas investors. Only 630 million are Shanghai-listed A-shares earmarked for mainland investors. Shareholders approved the proposal in June.

Like its peers, CCB is raising money to shore up its balance sheet after it made Rmb239.8 billion ($35.3 billion) of new loans last year.

Analysts have said that the share sale will help CCB meet regulatory requirements of an 11.5% capital adequacy ratio for the next two to three years. At the end of the first quarter, CCB's CAR slid to 11.44% from 11.7% three months earlier even though its net profit rose 34% from a year ago on the back of robust growth in net fees and net income as well as a decrease in asset impairment losses.

The timing of CCB's upcoming sale is not yet known, and bankers say it will depend to a large extent on when the regulatory approvals come through. With so many planned issues, the authorities are likely to try to stagger them. Based on how much information has been made public so far, it seems Bank of China may come first, followed by CCB and then ICBC, although that is far from certain.

BOC has mandated Bank of America Merrill Lynch, BOC International, CCBI, Credit Suisse and ICBC International for the H-share portion of its rights issue. It is planning to offer 1.1 rights shares for every 10 existing shares and based on the number of outstanding shares, the A-share portion will account for about 70% of the offering, while the H-share portion will make up the remaining 30%. Huijin Investments owns 67.53% of the bank but has not yet said whether it will take up its entitlement in full.

Meanwhile, ICBC has mandated BNP Paribas, BOCI, UBS and its own investment banking arm, ICBC International, for the H-share portion of its offering. The bank has provided no further details about the sale so far, except to say that it will equal as much as 20% of its outstanding share capital. Huijin owns 35.41% of ICBC.

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