Deal of the Year, Best Privatization
Bank of China: restructuring and $2.67 billion IPO
Bank of China International, Goldman Sachs, UBS Warburg and Nomura (POWL)
What now stands as the largest bank merger and restructuring in Asian history outside Japan was two years in the making and of critical importance to the Chinese government. The merger and restructuring of 13 affiliate financial institutions of the Bank of China group in Hong Kong has heralded a new chapter in the country's privatization process as the government turns its attention to the arduous, but critical task of overhauling its domestic banking system.
The IPO came during a year when institutional investors fine-tuned their analysis of China's more challenging privatizations and often found the latter wanting. Considerable skill would be required to enable Bank of China Hong Kong to price a deal towards the top end of its indicative range and at a premium to the domestic banking sector.
The task was not helped by a rash of scandals at the bank towards the end of 2001, the subsequent loss of the deal's New York listing and a sluggish economic backdrop in Hong Kong, where local banks were engaged in a fierce price war. General market conditions were also extremely volatile, with the Dow Jones falling to its lowest point in four years over the course of the two-week book-build.
The IPO appeared to have little in its favour except for the strategy of the lead management group, which has since proved to be inspired. In the knowledge that institutional investors would provide little price leadership, a decision was taken to play off different investor constituencies against each other in the hope of leveraging up final pricing. By maximizing distribution channels and setting a very wide price range, the three hoped to entice investors with the prospect of a cheap offering, while using the deal's core investor base as a springboard to wider participation and more expensive pricing.
And it worked spectacularly. An order book of $19 billion was amassed, allowing the 1.49 billion placement tranche to be priced at HK$8.50, compared a range of HK$6.93 to HK$9.50 and 804.3 million retail tranche at a 5% discount. The order book had a roll call of 450 international institutions, 242 corporates, 80,000 Japanese retail investors and 385,000 Hong Kong retail investors.
Interestingly, all four investor segments viewed the transaction slightly differently. For the unprecedented number of corporate investors, the IPO was a relationship building exercise with the bank and Chinese government. For Japanese retail investors it was a China growth story and the first Chinese POWL (Public Offer Without Listing) of its kind. For Hong Kong retail investors, popularity was a reflection of the bank's deep roots in the Territory.
This was a defining deal of 2002. We recognise it as deal of the year both in terms of the massive amount of M&A restructuring work that had to go into the creation of the new Bank of China (HK), and also because of the success of the IPO itself. In totality, this was an immense and critical transaction.
Lawyers acting for Bank of China comprised Shearman & Sterling in regard to US law, Clifford Chance in regard to Hong Kong law and Jun He Law in regard to PRC law. Acting for the joint sponsors were Sullivan & Cromwell for US law, Allen & Overy for Hong Kong law and Commerce & Finance Law for PRC law.
Most Innovative Capital Markets Transaction, Most Innovative Bond Deal
Malaysia Global Sukuk Inc, $600 million
HSBC
The Federation of Malaysia set its mark on the world of Islamic finance in late June with the completion of the world's first Islamic global bond issue. Representing the first investment grade sovereign FRN from Asia since 1985, the Shariah compliant issue not only achieved all of the government's objectives, but was also a huge coup for the innovative skills of lead manager HSBC, which has now won this award for two years running.
The key issue for the five-year deal was its ability to penetrate a new investor base, while maintaining balanced distribution between liquidity and buy and hold investors. It also required an immense amount of structuring and HSBC has won many plaudits for its pioneering efforts.
In order to appeal to the widest possible investor base, the bank had to work hard to keep the structure as clean and simple as possible. Therefore, despite the fact that an SPV and pool of property assets gave the deal the appearance of a securitization, the final product looked like vanilla debt. It was also priced at a spread to Libor based on the sovereign's credit strength with no reference to property prices, yields or any other aspect of the asset pool. These assets were only there in the first place to get round the founding principle of Shariah law, which forbids the receipt or payment of interest.
The deal's execution was also faultless and HSBC managed market expectations well by going out with a relatively small deal size then increasing it as the transaction gained momentum. Even the unexpected announcement and subsequent retraction of prime minister Mahathir Mohamed's decision to resign the weekend before pricing failed to stop the deal in its tracks, with books closing at the $1.1 billion mark.
In terms of pricing, the deal came flat to the sovereign's theoretical credit curve. At the outset few would have predicted such a runaway success given that virtually none of the $200 billion global pool of Middle East-based Islamic funds had purchased a bond deal before. And since the Malaysian government is extremely keen to develop an international Islamic bond market, success in pricing such an unusual transaction without the need for a premium, is likely to encourage greater use of Islamic bonds for general funding purposes in the future.
Lawyers on the deal were Cleary, Gottlieb for the issuer and Allen & Overy for the underwriters
Best Equity Deal, Best IPO
Maxis Communications Berhad, $803 million
ABN AMRO Rothschild, Goldman Sachs, ING, CIMB, RHB Sakura
The Malaysian equity market received its biggest test since the financial crisis in May when the country's largest cellular operator, Maxis, attempted to launch a sizeable deal without having to make the kind of pricing sacrifices that had so far been tempting investors back to Southeast Asia. Its success proved a true watershed and one, which has now moved the market forward both in terms of the amount of paper that can be absorbed and the valuations that can be achieved.
The deal combined a strong equity story and glitch free execution. It consequently made a very convincing showing with both domestic and international investors, at the same time overturning expectations that retail would be the mainstay of the order book. As it turned out, there was a 52%/48% allocation split between domestic and international accounts, with books domestic books closing four times oversubscribed and international five times oversubscribed.
From the outset, many commentators had thought Maxis's pricing expectations were aggressive and it said a lot about management's persuasive abilities to maintain indicative pricing as markets fell around them. At the end of May, for example, comparable Asian telcos were trading on an average EV/EBITDA level of 6.7 times 2002 earnings. By the end of roadshows, they had dropped to 6.3 times, while Maxis priced at 6.6 times.
Fund managers, analysts and Malaysian experts generally find it difficult to think of anything negative to say about the Usaha Tegas group, which ultimately owns Maxis. The company's corporate governance track record and its founder's ability to develop value-added businesses have long stood out in a country where neither has seemed prominent in recent years.
This was the deal fund managers had been waiting for. As one of the lead managers concluded at the time, "This deal should give investors confidence that there is wide underlying support for the market. We always knew that investors were likely to be receptive to Malaysia, but no-one quite realized just how robust that reception would be."
Lawyers acting for the deal included Herbert Smith acting as the underwriters' international counsel and Clifford Chance as the issuers' international counsel
Best Mid-Cap Equity Offering
China Oilfield Services, $287.5 million IPO
Credit Suisse First Boston, Merrill Lynch
In mid-November CNOOC affiliate China Oilfield priced one of the most successful international equity offerings from the Mainland in recent years. The 1.334 billion H-share offering garnered nearly twice the demand of a much larger deal for China Telecom, which had struggled to come to market only the week before.
The deal was priced just off the top of its indicative range after receiving double-digit oversubscription on both its retail and institutional tranches, the first time a China IPO had done so since 1999.
Like many successful equity offerings, China Oilfield combined an appealing equity story, the right marketing strategy and an order book, which had to be actively scaled back. The leads' strategy was to build momentum with local accounts before drawing in the anchor orders and using both as a lever to bring final pricing down. As one banker said at the time, "Having gone out very aggressively to Asian accounts, the book was oversubscribed from day one. Indeed by the time the management team left Asia, the whole deal was already significantly oversubscribed."
Four main aspects of the deal stand out. Firstly, investors took to the offshore China oil story. Secondly they were comforted by the company's close relationship with CNOOC and its numerous joint ventures with international competitors that mitigate future competition risk. Thirdly management has over 20 years experience and performed well over roadshows. Fourthly, the valuation was sensible relative to market conditions and priced at a discount to global comparables such as Baker Hughes and Schlumberger of the US.
Lawyers to the deal were Freshfields, Bruckhaus, Deringer and Haiwen as the underwriters' international and local counsel, with Sidley Austin Brown & Wood plus Commerce and Finance as the issuers international and domestic counsel.
Best Small Cap IPO
Harbin Brewery, $55 million
Global coordinator, Cazenove, joint lead manager, First Shanghai Capital
Good things often come in small sizes. Such was the case with the $55 million IPO for Harbin Brewery. The deal was a first ever Hong Kong listing of an 'offshore Sino-foreign joint venture' and has seen good returns for investors in the aftermarket.
The company is controlled by the Hong Kong-based private equity firm, China Enterprises Development Fund (in which Fidelity is an investor) and the Harbin Provincial government. To give a bit of history, it was bought from Mitsui in 1998. Now after the IPO, it is now 32% owned by the public, 37% by China Enterprises Development Fund and 31% by the Harbin Provincial government.
The company wanted to raise capital in order to fund future acquisitions in China's fast consolidating beer industry. It has already acquired breweries, and is taking advantage of its strong position at the Northeastern corner of China - where beer consumption is the highest - to grow its way South.
Once a loss-making brewery, it is now a model enterprise and has excellent financials, and good professional management thanks to its foreign ownership. Given the unique structure - being part owned by a foreign entity, and part by local government - this deal required approval from six ministries before it got the go-ahead to list in Hong Kong.
In spite of atrocious market conditions in the Summer, the deal priced at a PE multiple of 17.5 times and was 10 times oversubscribed by institutions - with 88% of orders coming from top-tiered institutional investors in Europe and Asia.
The average closing price for the 30 days up to November 14 was a 29% increase over its IPO price of HK$1.56 - equating to an annualized return of 78%.
This was a great deal from a China play that offers good stable growth. Plus the acquisitions of China brewers by Interbrew and Anheiser Busch means at worst, investors can look forward to large potential upside if Harbin Brewery ever gets bought by one of the big global giants.
Credit goes to Cazenove, for whom this was the first Asian IPO where the firm took a sole global coordinator role. Underwriters' counsel was Simmons & Simmons.
Best Secondary Offering
Technology Resources Industries Berhad (TRI), $233 million restricted share offering and $198.6 million rights offering
CLSA, Libra Capital
At the outset many equity specialists were highly dismissive that debt-laden TRI would be able to complete any kind of deal at all, let alone one that would close 1.5 times oversubscribed and now rank as the year's best performing Asian equity deal. Taking the cellular company to market was a brave undertaking for the lead managers, but one that has reaped significant dividends. Success can be attributed to a clever marketing strategy that has been vindicated by subsequent events.
Firstly, the macro picture for Malaysia started to improve at the beginning of year, with international funds returning to Southeast Asia for virtually the first time since the Asian crisis. For those investors prepared to take a new look at Malaysia, TRI presented their first real opportunity to make a sizeable investment in a market, which was then only trading volume of $158 million a day.
TRI also offered plenty of value on a stand-alone basis. With 2.1 million subscribers at the end of 2001, it stood second to Maxis in terms of market share. In terms of revenue per subscriber, however, TRI was valued at only $750 against a proposed IPO valuation of $1,400 for its slightly larger rival.
The upside was clear, but so was the downside as a result of a debt restructuring which was necessitating the re-capitalization and the uncertain future of chairman Tajudin Ramli, a long-time associate of out-of-favour former finance minister Tun Daim. But after the Malaysian SFC refused to allow Ramli to participate in the restricted offering, investors bet that this was a clear sign his days were numbered. Most are said to have bought the stock in the belief that TRI would get taken out at a premium by another player.
And so it is proving, with Telekom Malaysia offering to buy out investors at M$2.75 per share. For investors that participated in the restricted offering at M$1.75 per share and were locked-up for six months, this represents a 57% premium and for those that participated at M$1.93 per share, a 42% premium. Pricing at these levels had been fixed at the very beginning of January, although the deal was not formally allocated until early February. This had been done to accommodate the rights offering and luckily for the lead managers, the underlying share price remained relatively stable throughout the entire marketing period.
Lawyers on the deal were White & Case acting as international counsel to the issuer and Allen & Overy as international counsel to the underwriter.
Most Innovative Equity Deal
SK Corp/SK Telecom, $1.68 billion combined exchangeable bond and ADS
Credit Suisse First Boston, Goldman Sachs, SK Securities
SK Corp's determination to monetize a percentage of its stake in SK Telecom (SKT) presented lead managers CSFB and Goldman Sachs with one of the most complicated equity offerings to execute in 2002. The deal was also a long time in the making, having initially been scheduled to come to market at the beginning of the year. Having then been pulled back because the company was not happy with SKT's share price, it was revived in July, but managed to hit one of the most volatile trading weeks of the year. For the leads, it rapidly turned into an exhausting experience of trying to hold a book together in the face of constantly gyrating markets and lengthy roadshows.
However, an unexpected rally the night before pricing gave the deal a final necessary push and resulted in the successful completion of the year's largest combined offering and Korea's first concurrent exchangeable and ADR.
The innovative aspects came from a structure, which was designed to allow a number of vendors (SK Corp and SK Global) to achieve a true sale. In order to do so, the leads set up an offshore trust, which meant that bondholders converting into equity would still be able to receive ADRs even if the company's foreign shareholding limit filled up. The leads also had to make sure that dividends and voting rights were passed through to bondholders rather than retained by the vendors and the deal marks the first from non-Japan Asia to have done so.
In the run up to pricing, one of the greatest challenges was to stop investors shorting the stock in a falling market. And while it was impossible to prevent selling pressure, the stock managed to hold its own, falling 9.5% over the entire filing and marketing period compared to a 13.2% decline in the Dow Jones over the same period.
The ADR's were priced at $21.54, representing a 3.6% discount to the last sale - the second tightest on record for a non-privatization from Korea. For SK Corp, successful completion achieved two key objectives. The 8.6% equity sale went a long way to removing a heavy overhang over the stock in which it owned 26.8% pre-sale. And for the parent's balance sheet, the deal helped it to manage its debt profile as coverage ratios should improve as conversion occurs.
Lawyers acting on the deal comprised Cleary, Gottlieb as underwriters international counsel and Shin & Kim as domestic underwriters counsel, with Skadden, Arps, Slate, Meagher & Flom as issuer's international counsel and Woo Yun Kang as domestic counsel.
Best Equity-Linked Offering
Fubon Financial Holdings, $430 million convertible
Credit Suisse First Boston, Salomon Smith Barney
The Asian convertible market in 2002 will be remembered for the diversification wrought by a handful of transactions from Taiwan's financial sector. Prior to Fubon, virtually all Taiwanese deals were small tech-related offerings and under Taiwanese law, investors had to convert their bonds into Entitlement Certificates ahead of the underlying stock, a laborious process that could take up to three months. Fubon, by contrast, not only offered investors size and sector diversification, but was also the first offering from the Island Republic to benefit from a legislative change allowing investors to convert directly into shares.
Fubon marked the first of a number of deals from the country's newly created financial holding companies and unsurprisingly its stand-alone credit strengths and first mover advantage enabled it to secure tight pricing, with books closing eight times oversubscribed after a 15 hour marketing period. By year-end it was still one of the best performing, up 3.66%, where its two immediate successors were still struggling to achieve par.
For Fubon, the deal enabled the group to raise more proceeds for its acquisition war chest, but more importantly, it was also able to unwind the cross share holdings, which underpinned its structure prior to re-organization as a financial holding company in December 2001.
Having deliberately set out to whet the market's appetite with a smaller than expected issue size of $325 million, strong demand enabled the deal to be upsized to $375 million and after the greenshoe was exercised, total proceeds were bumped up to $430 million. For outside observers, two of the most striking features of the transaction were its tight credit spread relative to its BBB-/Baa3 rating (190bp over Libor) and its extremely expensive volatility, which was priced right on top of historic volatility.
Lawyers for the deal were Simpson, Thacher as underwriters' counsel and Baker & McKenzie as issuer's counsel.
Best Bond Deal, Best Investment Grade Bond Deal
Petroliam Nasional Berhad, $2.73 billion Bond
Morgan Stanley, Barclays Capital, HSBC, Salomon Smith Barney
After a lengthy absence from the international bond markets, Petronas re-assumed its position as Asia's premier blue chip borrower in May. With a $2.73 billion three-tranche transaction, the oil company completed Asia's largest ever corporate borrowing and the region's second ever largest offering behind the Republic of Korea's $4 billion issue. The success of the deal meant that investors were provided with a second liquid proxy to play Asia alongside the Federation of Malaysia's benchmark 2011 issue.
Pricing of the three tranches (10-year dollars, 20-year dollars and seven-year euros) re-filled the then rated Baa1/BBB credit's yield curve and came at the tightest end of the final indicative range. Most market participants concluded that Petronas timed its deal extremely well, locking in low cost borrowing and followed a sensible strategy of setting out with a small issue size, then upsizing the deal once the market settled down and came to terms with the new supply. Initial fears that it might swamp the market proved unfounded and although Malaysian sovereign spreads had moved out 6bp two weeks before pricing, analysts believed that they would come in again once investors realized that there was not a lengthy pipeline of issuance behind the deal. The late inclusion of a 20-year tranche was also deemed a wise strategic move and the company followed a clever policy of not making its intentions known at the outset and letting US investors gain too much leverage that would have pushed pricing too wide relative to the new 10-year.
For many investors, key to the pricing was where the deal came relative to the sovereign and the deal's large size did necessitate a slight new issue premium. Traditionally, semi-sovereign Asian credits tend to trade about 20bp wide of their respective sovereigns, but Petronas had previously been able to completely close the gap because it had a one-notch higher rating than the sovereign from Moody's. In this instance, for example, the 10-year priced about 15bp wide of the Malaysia 2011 on a like-for-like basis.
The strategy and subsequent success of the new offering completely expunged any painful memories of its last foray to the international markets in the summer of 1999, when it was unlucky enough to hit a patch of extreme market volatility and had to considerably downsize its expectations.
For the lead managers, the deal was also one of the most satisfying of the year, as it paid normalized fees, with the seven-year paying 40bp, the 10-year 45bp and the 20-year 87.5bp
Lawyers acting for the deal were Cleary, Gottlieb as issuer's counsel and Millbank Tweed Hadley & McCloy as underwriters' counsel.
Best Non-Investment Grade Bond Deal
Indofood Sukses Makmur, $280 million Eurobond
Credit Suisse First Boston
More than any other investment bank, CSFB has been able to stamp its mark as the lead manager of a number of market opening deals for Indonesia during 2002. Its five-year deal for Indofood underlined investors' preference for high yield deals by the right Asian names and strong demand enabled the company to increase the issue size from $200 million to $280 million. In doing so, Indofood was able to mitigate any lingering concerns about re-financing risk and move its debt maturity profile from short to long-term.
The credit story was successfully marketed by emphasizing Indofood's dominant market position, its integrated and therefore efficient cost structure, as well as the growth potential both domestically and overseas.
One of the most interesting aspects of the B/B3 rated deal was its distribution pattern and in particular the incredibly strong private banking demand out of Singapore. As one observer commented at the time, "Indofood has a brand name which every investor knows and respects. It's the San Miguel of Southeast Asia."
Indeed, Indofood proved to be the high water mark of private banking demand for Asian credits in 2002 and the deal saw a 38% allocation to the asset class, with 44% placed with funds and the remaining 18% with banks. In terms of geographical splits, very little of Indofood's deal was placed in Indonesia, with 72% distributed in Asia as a whole, 8% in Europe and 10% with offshore US accounts. In doing so, the deal built upon a pattern whereby each successive deal from Indonesia in 2002 was able to attract a wider international investor base.
But for Indofood, the most important consequence of its deal was that it was able to classify 88% of its debt as long-term. Prior to the issue, the company had reported a gross debt position of $621 million and cash position of $115 million. Over the course of 2002, the company had $250 million debt falling due, of which $57 million had already been re-paid and proceeds from the bond issue were used to re-finance the rest.
Clifford Chance was deal counsel, and Hadiputranto, Hadinoto & Partners was issuer's counsel.
Best Local Currency Bond Deal
Projek Lebuhraya Utara-Selatan Bhd (PLUS), M$5.1 billion Islamic bonds
RHB Sakura
This was a landmark local currency bond deal for Malaysia which paved the way for PLUS to launch its IPO; the effect of both deals was to confirm that Malaysia is going in the right direction in its efforts to clean up some of the corporate governance messes that sprang from the 1997 financial crisis.
What also stands out about this bond is its sheer size. PLUS issued its M$5.1 billion ($1.34 billion) BaiÆ Bithaman Ajil Secured Serial Bonds (æBAIDSÆ) on 31 May 2002 as part of its debt restructuring exercise to reduce its debts by more than half to M$7.2 billion. RHB Sakura was lead arranger of the BAIDS as well as the advisor for PLUSÆ debt restructuring exercise.
The key objective of the PLUS debt restructuring scheme was a permanent resolution of the inter-company loans extended by PLUS to UEM and Renong. Moreover there was a desire to reduce the high gearing position of PLUS, all with a view to unlocking the intrinsic value of the company to enable PLUS to move toward a listing on the Kuala Lumpur Stock Exchange.
The BAIDS issue, which formed the core of the debt restructuring scheme, was accorded a AAA rating by Rating Agency Malaysia, by far, the largest serial bond issue rated a AAA on a standalone basis. This is also the only toll road company in Malaysia that has been assigned a AAA rating to-date. Aside from PLUSÆ robust cash generating ability, the structure of the BAIDS included tight financial covenants including the monitoring of PLUSÆ expenditure by a programme agent. The BAIDS deal was over-subscribed despite the size and the somewhat poor conditions prevailing in the bond market at that time. The BAIDS were issued in 15 tranches with multiple maturities ranging from one to 15 years and Islamic profit margin (which equate closely to coupons) of between 3.40% and 7.50%.
Thanks to the success of this groundbreaking deal, PLUS subsequently able to list in July.
Best Bank Capital Deal
Bank Mandiri, $125 million
UBS Warburg
Unlike 2001, bank capital deals have provided relatively slim picking for investment banks during 2002. One deal which stood out if for no other reason than few would have envisaged it would have been possible even a year ago was Mandiri's lower tier 2 transaction of July. The completion of the 10 non-call five transaction set a new record as the lowest rated ever to successfully raise dollar denominated subordinated debt.
Getting the deal done showed just how far the bank and Indonesia had come since the previous December when $125 million was raised from an FRN that marked the first sovereign related deal since the Asian financial crisis. Lead manager UBS Warburg also had to fight hard with the agencies and particularly Moody's, which initially assigned a Caa1 rating before a successful appeal persuaded it to rate the deal in line with the bank's senior debt rating of B3.
Mandiri was keen to widen its investor base as far as possible, but with markets proving highly volatile it was still able to successfully fall back on a strong Asian bid and diversify away from Indonesia, which took 33% of bonds compared to 40% in Singapore, 15% in Europe and 12% elsewhere, mainly Hong Kong. Pricing came at 747bp over Treasuries, equating to 682bp over Libor, offering a roughly 280bp pick-up to the secondary levels of the bank's outstanding 2006 FRN, which has put and call options in 2004.
The deal was also boosted by the central bank's decision to allow domestic banks to hold each other's subordinated debt with a 20% risk weighting, so long as it is placed on their trading books. If, on the other hand, they decide to hold subordinated debt on their investment books, then it has to receive the full 100% risk weighting.
Lawyers acting for the deal were Linklaters as underwriters' counsel and advisors to the trustee, Maples & Calder for Cayman's Island law, Hadiputranto, Hadinoto & Partners as issuer's counsel.
Best Project Finance Deal
Phu My 2.2 $480 million power project
SG, ANZ, Sumitomo Mitsui
It would be foolish to underestimate the importance of the Phu My 2.2 power project for Vietnam. It marks one of the biggest investment ever into the country and is its first ever build-operate-transfer project in the country.
The project has been in the works for years with the first bid solicitations occurring back in 1997. It faced a myriad of obstacles in getting closed and the lead arrangers and sponsors - EDF, Sumitomo and TEPCO - must be given full credit for the innovation and perseverance they showed in overcoming the hurdles.
The project structure is a glorious mix of all the various tools that are available for financing projects. There is strong multilateral support from Proparco, JBIC, the World Bank and the ADB; political risks insurance from Sovereign of Bermuda; commercial bank lending; strong equity support and good government co-operation. In essence what has made this project stand out is the methodical way that all the various risks have been highlighted, understood and allocated to the right parties. But more than just being a clever bit of financial engineering, this is a project that needed to close and has strong commercial rationale behind it. It will be the cornerstone of developing Vietnam's power supply, which is growing by 13% a year. And it will use gas sourced from the local Nam Con Son gas field. This was a well thought out, well executed deal from the old school of project finance which will materially benefit the development of Vietnam.
Legal advice came from a variety of sources. Allen & Overy and Gide Loyrette Nouel advised the project company. Clifford Chance, Vilaf Hong Duc and Drew & Napier were counsel to the common lenders. Freshfields advised JBIC.
Best Domestic Securitization
ABS Real Estate Berhad, M$450 million
Deutsche Bank
The award for best domestic securitization goes to the M$450 million commercial mortgage backed securitization that Deutsche Bank put together for Sunway City. Although the guidelines for Malaysian securitization were introduced in April 2001, the early deals were heavily criticized for lacking transparency and by being badly priced.
Consequently, local investors shied away from the transactions that were issued, questioning why they should put their money into products that were still new to them with spreads barely up from what they could get on more familiar straight corporate debt.
Sunway City's deal wins the award on the grounds that it set the standard for the domestic Malaysian ABS market: it walks, talks, acts and looks like a proper securitization and conforms to international standards.
The transaction highlights how securitization can be used by companies for balance sheet management: Sunway's transaction is part of continuing restructuring efforts to lower its gearing level and strengthen its financial profile. Although Sunway achieved sales of almost M$600 million in 2001, up 22.4% on the previous year, the company has long term debts of M$558.4 million and total liabilities of M$1.2 billion. This deal lowers the company's gearing from 1.3 times to 0.8 times, which will help Sunway to raise cheaper funds going forward.
ABS Real Estate packages together five property assets - including the Sunway Lagoon Resort Hotel and Sunway Hotel Penang buildings - plus the Sunway Lagoon Theme Park's equipment and rights lease as well as preference shares in Sunway Pyramid.
Under the structure of the deal, the assets, estimated to be worth M$892 million, were purchased by the SPV, which then issued M$450 million of notes to domestic investors. Sunway will be able to lease back the properties for a total period of 35 years, although it has the option to buy back the properties and fully redeem investors after five years.
The deal has been split into four tranches. Three of these, the class-A M$120 million tranche, rated triple-A by RAM, the class-B M$75 million AA2 rated piece and M$45 million of class-C1 notes, rated A2, have expected average lives of five years and legal maturity of six years.
In addition, there is a M$210 million A2 rated class-C2 three year piece. This will be amortized semi-annually based on projected excess cash arising from lease rental income from Sunway City as well as dividend and redemption payments from the redeemable preference shares.
The triple-A piece offers investors a coupon of 5.25%; the double A notes 5.75%, the C2 tranche 7.875% and the C1 bonds a coupon of 8%.
With regards to the pricing, it could be argued that Deutsche learnt lessons from arranging the M$310 million collateralized loan obligation for the state asset management company, Danaharta. With a 4% coupon, the pick up was only a shade higher than the 3.995% average yield for triple-A rated five-year corporate bonds, as calculated by Bank Negara. This was considered far too tight given the widely held view that the transaction lacked transparency.
Deutsche realised that for the securitization market to take off in Malaysia, investors need to see get a healthy premium while they are still getting to grips with the product.
With 1.75 times oversubscription and interest shown by banks, insurance companies, asset managers and corporates, ABS Real Estate Berhad shows that securitization has a future in Malaysia. But that future depends on deals being properly structured, transparent and priced shrewdly.
Mallesons Stephen Jacques advised the bank on the structure of the deal.
Best International Securitization
Woori Card Finance 2002, $500 million
UBS Warburg
Securitization transactions are typically a lot more complicated than your average bond deal, which is why the typical winner of this award would be the deal with most whistle and bells attached or maybe even a new asset class. Not so this year.
The $500 million deal that UBS Warburg put together for Woori Card in October was not the first public 144a credit card deal to come out of Korea, nor did it feature any great structural innovations to distinguish it from what had gone before. However, in order for the Woori transaction to be completed, several obstacles had to be overcome and the quality of execution in the face of these makes this deal a worthy winner.
The first challenge to be dealt with was that Woori Card had only been in existence for seven months when UBS was mandated. In order to secure high credit ratings, an issuer would usually have to present historical records going back several years. Even before Financial Security Assurance came on board to guarantee the bonds - bringing the deal up to triple-A status - Moody's and S&P gave A2/A underlying ratings to the deal, one notch above the sovereign ceiling. This highlights the effort put in by UBS on ensuring that the quality of data on Woori's card portfolio conformed to the highest international standards.
In addition, it also highlights the additional level of credit support structured into the deal. This was especially important with the transaction because of the increasing concerns about the Korean credit card sector. Defaults were at record highs across the industry and there were mounting fears that investors and the monolines would shy away from the asset class. Consequently, the Woori Card deal featured a high level of credit enhancement to ensure that the underlying assets could withstand the most severe market conditions.
Finally, aside from facing deteriorating sentiment about Korean credit cards, Woori's deal was also launched in one of the most difficult weeks for the debt capital markets in 2002. Hutchison was forced to scrap plans for E1 billion and ú350 million offerings, so getting a transaction done in that week was an achievement in itself. And getting the deal to price at the level it did was no small feat either.
The bonds priced at 99.778 with a nominal coupon of 45bp over Libor, giving an effective spread of around 49.8bp. With other credit card deals trading at 53bp-54bp in the secondary markets at the time, Woori's pricing was an excellent result for all concerned.
Woori's deal was 1.5 times oversubscribed with 41% of the demand coming from North America, 21% from Europe, 20% from Japan and 18% from ex-Japan Asia buyers. The majority of the bonds placed with banks (64%), with asset managers (17%), insurance companies and corporates (7%) taking the remainder.
Legal advice on the structure of the deal came from Sidley Austin Brown & Wood, Freshfields, Kim & Chang, Shin & Kim, Kim & Comapny and Walkers.
Best Syndicated Loan
Wallenius & Wilhelmsen's $1 billion acquisition financing of Hyundai Merchant Marine's car carrier division
Citibank was the debt restructuring adviser, coordinating arranger and joint-bookrunner for the acquisition financing. Tranche B was led by Korea Development Bank and Korea Exchange Bank.
This has to be one of the most complicated loans ever to come out of Asia.
The loan was put together to help finance the acquisition of Hyundai Merchant Marine's car carrier division by global leader, Wallenius & Wilhelmsen.
The loan was made to the newco that will result from this piece of M&A, and therein lies the rub. On the surface this might look like a shipping financing. But it was nothing of the sort.
The loan is actually being made to an entity that has zero assets, but will service the debt via a seven-year contract with Hyundai Motor to ship its cars to export markets. The lenders thus had to do some extensive cashflow analysis. In sum, the ability to service this loan is directly dependent on how successful Hyundai Motor (and its subsidiary, Kia) is over the next seven years in selling its cars in markets like the US.
The fact that Hyundai Motor is a 20% stakeholder in the newco, gives some comfort that its interests are aligned with the lenders.
Wallenius and Wilhelmsen put in $300 million of equity. Meanwhile, the acquisition financing then consisted of $300 million of new money arranged by Citibank via a syndicate of international banks, and a $650 million six year amortizing term loan arranged among the various Korean lenders to Hyundai Merchant Marine, and led by Korea Development Bank and Korea Exchange Bank. A third tranche incorporated a one year revolving credit facility.
The deal was launched in August and was a slog to get done, due to the complexity of the whole deal. And right to the end, all the hard work could have unraveled if the EU had refused permission for theáacquisition on anti-trust grounds. At the beginning of December, these permissions were given and a letter to disburse funds went out on December 6.
Adding to the complexity, was the laborious process that was going on simultaneously of gaining consent from existing lenders to transfer the ships (which were collateral) from Hyundai Merchant Marine to the newco.
Bankers who worked on the deal remember it as being a complex effort, involving a host of moving parts - all of which had to be worked on in tandem, and any one of which could derail the whole process; and the underlying M&A transaction.
The loan was priced at an all-in cost of 240bp over Libor on tranche A, while tranche B had an all-in cost of 365bp over and tranche C 225bp over.
Legal advice on the deal came from Clifford Chance, Freshfields BruckhausáDeringer, Kim & Changand Lee& Ko.
Best Distressed Debt Deal
Lehman Brothers acquisition of W10 trillion of Woori Bank NPLs
This marks the largest NPL deal in Korean history and will not only help Woori to restructure and achieve its goal of listing in the US; it will also allow Korea's second biggest bank to share in the potential upside of the NPL workout, in partnership with Lehman.
For Lehman, it once again shows the firm's uncanny ability to spot a niche opportunity - one that will leave every other investment bank in Asia somewhat green with envy at the enormous upside potential this transaction has over the next three to five years - especially if Korea continues on its current growth path.
The deal will see a joint venture of Lehman and Woori acquire W10 trillion of NPLs from Woori in eight different special purpose vehicle tranches. It will buy them at different haircuts, and then work them out over several years through an asset management company.
The JV has already bought several tranches and will complete the process next year. From the perspective of allowing Woori to move the NPLs off its balance sheet (from a US GAAP standpoint) the JV is being structured as a 70/30 split between Lehman and Woori respectively.
As part of the deal, Lehman is buying convertible bonds in Woori, which could see the US firm own 5% of the Korean bank.
All in all, the deal looks like the start of a mutually beneficial partnership that will bring Lehman's technology to Woori and allow the Korean bank to come out of its distressed state and emerge as a major player in the Asian banking scene. With Lehman's help, other market participants will know that Woori has made the utmost efforts to clean up its balance sheet, in preparation for a new era of more prudent expansion.
Legal advice on the deal came from Milbank, Tweed, Hadley & McCloy, and Woo, Yun, Kang, Jeong & Han.
Best Domestic M&A Deal
Seoul Bank's $1 billion sale to Hana Bank
Advisers: Goldman Sachs and Samsung Securities advised the government, Morgan Stanley advised Hana
In our October issue we analysed the best performing M&A deals since the financial crisis in 1997. Top of our list was the merger between Kookmin and H&CB. This merger created a superbank.
When considering our M&A awards this year, we instantly knew that Hana's acquisition of Seoul Bank fell into a similar mould.
The merger created the third largest bank in Korea, with a market share of 13.2% in loans and 14.2% in deposits. It put together Seoul Bank's resurgent consumer banking business with Hana's clean corporate franchise.
The deal was transformational. It gives the new bank scale - versus their previous position as fifth by assets (Hana) and ninth (Seoul).
From the government's perspective, it is the most significant of its bank privatizations - and was especially sweet after an earlier failed attempt to sell the bank to HSBC.
This time round it did not have to offer any indemnifications to the buyer or put-backs of any kind. Moreover, while the government will have no management control, it will retain 30% of the new entity. This will allow it to sell out at a higher price and realize some returns for taxpayers. Should the stock not perform well, it has a guaranteed floor valuation, which is good for the next 18 months.
Seoul was won away from a foreign bidder by Hana in a nine-week auction process and has successfully started the second wave of bank consolidation in Korea - a process which will give the country one of the best banking sectors in the region and will result in enormous benefits for the Korean economy overall.
Lawyer to Hana was Lee & Ko, and legal adviser to the government was Shin & Kim
Best Cross-Border M&A Deal
Hutchison Whampoa and Singapore Technologies $250 million acquisition of Global Crossing
Hutchison Whampoa was advised by Goldman Sachs, Singapore Technologies by Merrill Lynch
There can be little doubt that this is the most audacious transaction to come out of Asia this year. It also shows how far Asia has come since the financial crisis - given that two Asian companies should buy a company of truly global scale.
When we considered the candidates for this award we tried to think what would be the deals that we would look back on a few years hence as landmarks. We also tried to consider what would create the most shareholder value for the buyer somewhere down the line.
We took the view that Li Ka-shing is a master trader and saw value in this asset. The tycoon, along with SingTech, is buying 61.5% of the foremost telecoms asset of its type. Moreover, they are paying $250 million for a company with $9 billion of assets. At its peak in the first quarter of 2000, Global Crossing had an enterprise value of $60 billion.
Both Asian companies will appoint four directors each to the board; giving them eight out of 10.
The deal closed in August, and actually saw Hutch and SingTech pay less than what they had originally offered in January.
Clearly, this is a deal that carries risks. Global Crossing owns the world's most populous fibre optic network, spanning over 100,000 route miles and five continents, 27 countries and more than 200 major cities. The market in those cities represents approximately 85% of the world's international telecommunications traffic. The network took four years to build.
However, it is an industry with a disastrous track record in making money, and the jury is still out on when that will change.
That said, Li Ka-shing has proven over the last 20 years that few people are better at trading assets (both good and distressed). His exit from Orange in the UK was, for example, a stroke of genius.
Clearly he thinks Global Crossing is a punt worth taking, and three or four years from now we may look back and see him trade out of this asset at a multi-billion dollar gain (once again). No doubt he has already calculated his downside and decided it is a risk he can live with, for the potential upside.
Hutchison received legal advice from Paul, Weiss; and Singapore Technologies from Latham & Watkins.
Best Private Equity Investment
Newbridge Capital's acquisition of a controlling stake in Shenzhen Development Bank
It would be rare for any magazine to put its neck on the line by giving an award to a deal that has yet to formally close. But such is the groundbreaking nature ofá Newbridge Capital's investment into Shenzhen Development Bank that all other private equity investments pale before its significance.
Officially the deal has had approval from the State Council, but the full and final details are yet to emerge. It is understood that four municipal companies owned by the Shenzhen government are selling their almost 20% stake in the bank to Newbridge. These four are: Shenzhen Investment Management Company; Shenzhen International Trust and Investment Company; Shenzhen Social and Labour Insurance Bureau; and Shenzhen Urban Construction Development Company. These four hold a combined 19.43% of the bank, with most of the rest of the shares in a public float.
Thus for 19.43% of the shares, Newbridge has wrested control of one of the cleanest Chinese banks - one with an NPL rate of only 6%. It is a groundbreaking deal that - in typically Chinese fashion - is being used as a test case for new regulations allowing foreign ownership of domestic companies. With Newbridge in control the feeling is that the bank will become even stronger. And even without the pass-on provisions that Newbridge secured from the Korean government in its acquisition of Korea First Bank, most in the market feel that this investment will almost certainly provide a very healthy return. It will also provide the blueprint for future bank investments in China and as such will always be seen as the deal that started it all rolling.
Best Private Equity Exit
Sale of Good Morning Securities to Shinhan Financial Group
H&Q Asia Pacific, GIC, Lombard
The key to good private equity investing is to know when to get in and when to get out. The sale by the controlling shareholders of their stake in Good Morning Securities to Shinhan Financial Group is an almost text book case of getting in at the bottom and getting out at the top. The H&Q Asia Pacific led consortium has made almost a perfect exit from its brave 1998 investment into Good Morning, in the process becoming the first successful international private equity divestment in Korea.
Back in September 1998, the consortium bought into the ailing Good Morning Securities, which was the renamed securities business of the Ssangyong chaebol. In 1997/1998, Good Morning had lost $191 million and needed new capital, fresh ideas and good leadership. It found all three in its new shareholders. The consortium paid some $75 million for its controlling stake with H&Q Asia Pacific contributing some $30 million.
Three and a half years later, the team have sold out making a return on their stake of over 600%. This was a hugely successful deal, which came about as a result of the shareholders' restructuring of the brokerage. This included defining the strategy of the company, bringing in new management, focusing on products and services and improving corporate governance.
It must be said that the investment benefited hugely from Korea's swift turnaround from the 1997/1998 financial crisis and the intervening tech market stock boom. However, with a six fold return, this deal allowed the shareholders to beat the return they could have made on the local index by three times, which shows that as much judgement as luck went into the success of this deal.
In the same way that the investment was one of the first private equity buy outs in post crisis Korea, so the exit should be the first of a new wave of sales in Korea as the process of consolidation speeds up. It sets a very high benchmark for other exits to try to match.
