Goldman Sachs last night raised HK$8.55 billion ($1.1 billion) from a sell-down of its stake in Industrial and Commercial Bank of China. This is the third time Goldman has reduced its holding since it invested in the Chinese bank in 2006 — and it could have chosen a better day to do so.
Things looked pretty good when the Hong Kong market closed. The Hang Seng Index added 1.7%, the banking sector was up and ICBC gained 3.6% to its highest close since early August. It is easy to understand why Goldman expected investors would be open to putting on some more risk. But a few hours later, everything had changed — yet again.
European stock markets were tumbling after a London clearing house increased its margin requirements for Italian securities, sending the country’s bond yields sharply higher, and in the US the Dow Jones futures indicated that stocks were due to open sharply lower. (At the end of the US trading session, the Dow Jones index had lost 3.2%.) Adding to the woes, HSBC missed analysts’ third-quarter earnings estimates and by the end of London trading its share price had fallen 4.8% — a move that is bound to have repercussions for Asian financial stocks today.
Faced with these headwinds and mindful not to cause a major dislocation in the share price, Goldman decided to reduce the size of its self-led sale somewhat even though the original deal was covered.Notably, the US bank is still one of ICBC’s largest shareholders so a stable share price is in the interest not just of ICBC and its other shareholders, but of Goldman itself as well.
When it launched at about 5.30pm Hong Kong time, the deal comprised 2.4 billion H-shares, or about 23% of Goldman’s remaining stake. They were offered at a price between HK$4.88 and HK$5, which translated into a discount of 3.7% to 6% versus yesterday’s close of HK$5.19 and suggested a deal size of about $1.5 billion. However, shortly before the deal closed at 9.15pm, it was cut to 1.752 billion shares, the equivalent of 2% of ICBC’s H-shares and about 0.5% of its overall share capital. This allowed for a tighter allocation, which should help limit the selling in the secondary market.
In light of the market backdrop and ICBC’s gains earlier in the day, the price was also fixed at the bottom of the range for the maximum 6% discount. This is wider than on Goldman’s previous two sell-downs, but well below the 12.1% discount that was needed to complete a $558 million block in Korea’s Hankook Tire the previous day.
At the final size, the deal was said to be more than 1.6 times covered, which suggests that it would have been about 1.2 times covered at the original size. According to a source, some investors did cancel their orders when the deal was downsized, but others, long-term investors in particular, came in or increased their original orders. About 75 investors took part in the transaction, including large global and regional funds, hedge funds and some existing shareholders. Market sensitive investors were said to be fewer than usual for this kind of deal, however.
Even after being downsized, this is the biggest block trade in Asia since Kookmin Bank raised $1.7 billion from the sale of treasury shares in its parent company, KB Financial Group. However, it is smaller than Goldman’s previous sales. In September last year, the US bank sold $2.25 billion of shares in a deal that was upsized by slightly more than 10% and priced at a tight 3.9% discount; and in June 2009 it raised $1.9 billion after selling close to 20% of its stake at a 4.5% discount. Interestingly, the placement price last night — HK$4.88 — was exactly the same as the price it fetched in June 2009. Last year’s deal was done at a higher price of HK$5.74.
Goldman paid just $2.58 billion for its original investment in the Chinese bank so it has got its money back twice over already. And it still owns about 8.5 billion H-shares, which at the current share price is worth approximately $5.7 billion. This translates into 9.9% of ICBC’s H-share capital and about 2.5% of its overall share capital. The remaining shares aren’t locked up, but Goldman has supposedly told ICBC and other investors that it currently has no intention to sell any more shares.
Despite its gradual sell-downs Goldman is widely viewed as a long-term investor in ICBC. However, the decline in the bank’s share price this year has forced Goldman to take some mark-to-market losses on its position and that may have resulted in some pressure from its own shareholders to reduce the stake. In the third quarter, when ICBC’s share price fell 55%, the bank reported a loss of $1.05 billion from its investment in the Chinese bank, which contributed to the overall net loss of $393 million for the quarter. Since the end of the third quarter, ICBC’s share price has rebounded 36% but it is still down 10% year-to-date.
Goldman didn’t comment on the reason for the sale, but it is no secret that banks globally are under pressure to increase their core capital as regulators are trying to ensure the financial system has a sufficient buffer against the uncertain economic environment. At the end of the third quarter, Goldman’s tier-1 capital ratio under Basel I guidelines was 13.8%, compared with 14.7% at the end of the second quarter. Its tier-1 common ratio narrowed to 12.1% from 12.9% in the same period.
