State-owned Chinese insurance company PICC Group has drawn up a short-list — albeit a very long one — of 17 banks that could get a role on the H-share portion of its upcoming initial public offering, sources said yesterday. The deal is highly awaited as it is likely to be one of the biggest IPOs in Asia this year, potentially raising as much as $4 billion to $6 billion from an A- and H-share listing combined.
All the banks were invited to a deal kick-off meeting yesterday, but the expectation is that not all of them will end up getting the most coveted roles as global coordinators or bookrunners. According to sources at the banks, their eventual roles will supposedly be determined by how much cornerstone demand they are able to secure prior to the launch. Before getting a spot on the list, the 17 banks had to indicate who they might be able to sign up as a cornerstone and roughly how much they would buy, and each of the banks have now been given a list of names to approach based on these earlier indications. Potential targets are said to range from strategic-type names, private equity funds and sovereign wealth funds to institutional investors and Chinese corporations. The banks have two weeks to get potential investors to express a preliminary interest and sign a non-disclosure agreement.
Those who fail to deliver may end up in a more junior role, such as joint lead manager, which will result in less fees and no league table credit. Or they may get bumped off the deal altogether. Sources said yesterday that no bank can be certain of getting a senior role at the moment, not even CICC, Credit Suisse and HSBC, which have been working with PICC on a transaction for quite some time as joint sponsors and have already drafted a listing prospectus.
The move to play the banks against each other this way is worrying if it means the issuer believes the amount of value-add that the banks bring to the deal is equal to the level of cornerstone demand.
To be sure, PICC is by no means the only issuer dishing out roles based on the ability to deliver guaranteed orders and the number of bookrunners on Hong Kong IPOs has been creeping up in the past couple of years as the market environment has become more challenging. Topping the list is Haitong Securities and AIA Group, which both had 11 bookrunners on their Hong Kong IPOs, although both deals were principally led by a smaller number of global coordinators (six and four respectively). Agricultural Bank of China, which raised $22.1 billion from a dual-listing in Hong Kong and Shanghai in July 2010 had seven bookrunners on the H-share tranche, but the key responsibilities for getting the deal done rested with four global coordinators.
However, PICC’s method of naming a long list of banks and sending them all out to gather cornerstone demand is new and demonstrates the amount of focus it has on achieving a high degree of certainty that the deal will get done.
Contrary to some earlier media reports, though, it doesn’t sound like PICC has asked the banks to hard underwrite the IPO, which would require them to commit to buying any potential left-over shares that are not taken up by investors. Or at least it hasn’t done so yet.
Based on information from sources as well as the invitation list to a PICC analyst briefing later this week, the other international banks that are currently on the list are Bank of America Merrill Lynch, Citi, Daiwa, Deutsche Bank, Goldman Sachs, J.P. Morgan, Macquarie, Morgan Stanley and UBS.
They are joined by the international arms of a number of Chinese banks, namely ABC International, BOC International, CCB International, Haitong International and ICBC International.
A key takeaway from the meeting yesterday, aside from the large number of banks linked to the H-share tranche so far, is the aggressive timetable. PICC is said to have submitted the initial listing application to the Hong Kong stock exchange about a week ago and is targeting a listing hearing in the next three to four weeks. This should enable the company to list in Hong Kong sometime in July.
Sources said yesterday that it is still unclear whether PICC will pursue a dual A- plus H-share listing, or if it will go ahead and do an H-share IPO in Hong Kong first. However, based on the aggressive time table, it doesn’t seem likely that it will be able to get both tranches done at the same time — especially since the company still needs a number of additional approvals from the Chinese regulators in order to complete an A-share offering in Shanghai and those can take a bit of time. Some sources noted that the Chinese regulators may be reluctant to approve a deal of this size in the current environment as they worry the market may be too weak to absorb it.
An H-share offering by itself is currently expected to raise between $2 billion and $3 billion, which will make it the biggest IPO in Hong Kong so far this year and on par with the upcoming IPOs for Formula One in Singapore and palm oil plantation company Felda Global Ventures in Malaysia, which are also targeting proceeds in that range. A concurrent A- and H-share IPO could raise twice that.
At present, CICC and Essence Securities are mandated for the A-share tranche and one source said PICC may add another one or two banks to that list later in the week. However, the line-up for the A-share tranche looks to be a lot less crowded than the H-share tranche.
Banks typically don’t like to work on deals with loads of bookrunners, not just because they are less profitable and result in less league table credit, but also because the process tends to become a lot less efficient with more banks on the ticket. That said, even if the massive line-up has dampened the enthusiasm for the transaction somewhat, few banks are likely to walk away from the opportunity to work on one of the biggest Hong Kong IPOs this year, especially given the thin deal volumes so far. So, the fight for cornerstones is on.
Aside from the number of potential bookrunners, the listing of PICC Group is also interesting because the company’s non-life business, PICC Property & Casualty, is already listed in Hong Kong. And since the latter is estimated to account for more than 50% of the revenue, there will be a lot of overlap between the two counters. PICC P&C’s share price has fallen 22.4% so far this year and is down 42% from its 2011 high that it reached in mid-July.