Sovereigns crown Citic's $3.5b placement

Four sovereign wealth funds pledged to invest in Citic Securities placement, with proceeds going towards helping the broker's margin financing business.

Citic Securities raised $3.5 billion in a private placement Monday night after issuing 1.1 billion new shares to 10 investors from around the world.

The private placement comes one week after Citic announced a strategic partnership with China's national social security fund and raised $1.5 billion from the fund in an H-share placement.

Proceeds will go towards Citic's rapidly expanding margin financing business.

It is the fourth largest placement in Asia including Japan so far this year up to June 15, according to data provider Dealogic.

Monday's private placement drew notable sovereign wealth funds as investors. The Kuwait Investment Authority agreed to take up $476 million worth of the offering, while Malaysia's state-owned investment fund Khazanah and Singapore's Temasek each pledged $300 million.

GIC, another sovereign fund from the city-state, agreed to purchase $249 million worth of shares in the mainland securities house.

Chinese fund Cinda Sino Rock accounted for the largest allocation of $749 million.

Fidelity will invest $319 million and the US hedge fund Och Ziff came in for $307 million.

Other investors included Yunfeng Financial,  the private equity firm founded by Jack Ma, which put up $307 million, and Harvest Global Investors, which will pledge $256 million.

Citic CLSA was the sole bookrunner, while Citic Securities International was the sole global coordinator of the deal, which consisted of 1.1 billion primary shares sold at HK$24.60 per unit, representing an 18.7% discount to the last close of HK$30.25.

A source close to the deal noted that the quality of the book and diverse geographic spread of investors would likely help bring "strategic value to Citic Securities". He declined to offer more specifics.

While there is some share dilution, the investors are expected to be long-term holders in the company. The 1.1 billion shares represent about 10% of the total existing share capital.

Citic initially announced plans last December to raise $4.5 billion by offering 1.5 billion new shares to 10 investors to fund its margin financing business.

In a June 8 filling, Citic noted the December placement had been downsized to 1.1 billion.

Citic's H-shares are up 3.6% year-to-date.

Institutional entry

On June 8, Citic announced plans to issue 640 million new H-shares to China's National Council for Social Security Fund and raise $1.49 billion. The shares on offer represent 54.3% of the total issued H-shares as of June 8, and 5.8% of the broker's total issued share capital.

The December deal was downsized from 1.5 billion to 1.1 billion, as a result of the capital raised by the NSSF.

The issuance on June 8 is part of three-year strategic cooperation framework between Citic and China's social security fund. The framework will allow the NSSF to choose which of Citic's services it uses, such as domestic and overseas investment banking, asset management, management of domestic and overseas stocks, block trades, securities lending and asset securitisation.

NSSF will own 5.02% of Citic and will become the second largest shareholder behind Citic Limited.

Both issuances are seen as a positive for Citic Securities. Moody's argues it will improve "the company's capitalisation, support business growth and strengthen its links to government-related entities."

Both deals come as Citic -- along with other mainland brokers -- experience rising liquidity and capital pressure from business expansion into capital intermediary and cross border businesses, which has pushed its leverage ratio to 5.4 times at the end of March 2015, up from 3 times as of year-end 2013, Moody's research dated June 15 said.

Citic's ability to complete the deals show its "strong access to capital, which will allow it to withstand current credit challenges facing the industry, including a broad shift toward more capital intensive businesses such as margin financing and principal investment," Moody's said.

The partnership with NSSF, which has Rmb1.5 trillion in assets under management as of year-end 2014, is also a positive development for the broker. A strong link with Chinese government-related entities will "reinforce Citic's position as a leading securities company in China, and Citic Group's role as an important platform for the Chinese government to manage its large portfolio of state-owned assets," the ratings service said.

BOC International echoed these sentiments, anticipating further synergies between Citic's international franchises and subsidiaries in coming months. This will be "the key competitive edge for Citic to fortify its leading position in China, especially amid a changing business environment for brokers, including the escalating brokerage commission rate war, rising connectivity of mainland and Hong Kong stock markets, IPO registration reform and global expansion of Chinese enterprises," according to a May 19 BOC International report.

Brokerages have been tapping equity capital markets amid soaring stocks. Huatai Securities, China's largest broker by trading volume, raised $4.5 billion in its Hong Kong listing in May. GF Securities meanwhile raised $4.1 billion in a Hong Kong listing post-shoe, while Haitong Securities raised $3.9 billion in a private placement late last year.

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