Private placements

Club deals flavour of the month in Hong Kong

Huadian Fuxin Energy is the latest Hong Kong-listed Chinese company to raise capital via a private placement, following similar deals by China Oilfield Services and China Suntien.

Huadian Fuxin Energy said on Monday that it was selling new shares at HK$3.30 each to a small group of investors, the most recent Chinese company to tap the markets in such a swift fashion ahead of the Chinese New Year holidays.  

The Fujian-based clean energy company raised about HK$1.178 billion ($152 million) over the weekend to boost its working capital, according to a person familiar with the matter.

Huadian Fuxin is the latest H-share listed company this year to go the route of a private placement, following China Oilfield Services (COSL) which pocketed US$759 million in early January and China Suntien which raised about US$200 million on January 22.

Huadian Fuxin sold the shares at a 6.52% discount to the close of trading on January 24 at HK$3.53. The stock fell on Monday by as much as 7.7% but recovered to trade down just 0.57% at HK$3.51 by the close.

The new shares represent 4.47% of the company’s enlarged H-share capital base, according to a filing with the Hong Kong stock exchange. 

UBS was sole global coordinator and settlement agent while UBS, Bank of America Merrill Lynch and CLSA  were joint book runners and joint placing agents.

The shares were sold to the maximum 10 investors allowed for such private placements. The banks started to bring investors into the deal on Thursday and continued over the weekend – a process known as “wall crossing” within banking circles. The participating investors comprised Chinese asset managers as well as global institutions that already held shares in Huadian Fuxin and hedge funds, a person familiar with the transaction said.

Investors bought into the hydro and wind power company’s prospects, encouraged by the Chinese government's pledge to clean up the environment.

China's central government recently reiterated its dedication to accelerate the development of clean energy usage in 2014 amid severe air pollution across the country. Equity research analysts at Nomura said on Monday that gas distributors and wind operators are key beneficiaries of the push and said they expect them to continue growing steadily in the next couple of years.

Joining the club

This type of capital raising, known by bankers as club deals, have become slightly more frequent in the last couple of years as they allow Chinese-incorporated companies with Hong Kong-listed H-shares to raise new capital without having to issue any shares to the National Social Security Fund (NSSF). The China Securities Regulatory Commission requires Chinese companies with state backing to donate 10% of the capital raised publicly to the NSSF to make sure the country's pension liabilities are covered. Huadian Fuxin is backed by state-owned generator China Huadian Group. 

"We're running at half a dozen to a dozen such H-share private placements a year," said one senior banker in Hong Kong. 

Another attraction of such private placements is that they are quick to do, a consideration this month given that the Chinese New Year holidays start later this week. A speedy transaction also reduces the risk to the issuer of being exposed to a downturn in the stock market during volatile or weak markets. Hong Kong's Hang Seng benchmark index is down 5.8% since the start of the year.

However issuers have to seek approval for the share placing well in advance, which limits the issuers' flexibility to time markets. 

Private placements are popular with big investors since they present an opportunity to buy shares in size and are tightly allocated, meaning they tend to have less of a negative impact on the share price.

Investment banks also like these deals since they command a higher margin than an ordinary overnight block trade. Companies are typically willing to pay a bit more to banks to find the right investors to take up the placement.

However, less well-known companies may struggle to attract big-ticket investors privately. In such small groups the biggest potential investors can also sway the pricing.

Not everyone is happy about the spate of private placements. Shareholder activists in Hong Kong such as David Webb have pointed out that minority shareholders do not get a chance to participate in these share sales even though their ownership is diluted. Some large institutions have sometimes also been left out in the cold and have taken to flagging their interest in buying shares at a discount to the issuer once it seeks regulatory approval for the share placing.   

Notable H-share private placements last year include a $3.1 billion deal that Goldman Sachs arranged for Sinopec in February, which was named “Best Secondary Offering” of 2013 by FinanceAsia because of its smooth execution.

Huaneng Renewables also raised $204 million in mid-October. The Huaneng Renewables placement, which was led by Credit Suisse, was priced at a slightly wider discount to its last close (7.5%) than Huadian Fuxin’s placement, while the significantly larger Sinopec deal came at a 9.5% discount.

COSL raised $759 million earlier in January from its private placement of new H-shares. The company, which is the largest integrated offshore oil field services provider in China and a subsidiary of state-owned oil and gas producer China National Offshore Oil Corp (Cnooc), sold a total of 276.272 million new H-shares at a price of HK$21.30 each.

Following that deal, China Suntien said on Jan 22 it had sold 476.7 million new shares at HK$3.35 each to six to ten investors. The deal was done within 48 hours, the book was well covered and went mostly to large long-only investors, according to a person familiar with the placing. Citigroup and Morgan Stanley arranged that placement.

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