Author: Gordon Platt

Corporate Debt

As Asian Economies Heat Up,Companies Rush To Raise Equity, Producing Record Wave Of IPOs

Industrial & Commercial Bank of China’s $21.9 billion stock issue on October 27 was the world’s largest initial public offering ever and brought the year-to-date total for Asian equity issues outside of Japan to $141 billion, the largest total on record for the region and a 30% increase from the same period a year earlier.

China, with its fast-growing economy, accounted for 41% of Asia-Pacific volume, excluding Japan, with $58.5 billion of equity issues in the first 10 months of 2006, a 97% increase from 2005’s year-to-date total, according to Dealogic, which tracks data on the global capital markets. IPO volume for the Asian region increased 71% to $65 billion from $38 billion a year earlier.

ICBC, China’s largest bank by assets, listed its shares simultaneously in Shanghai and Hong Kong, marking the first time that has ever happened. The total offering for a 15% stake in the bank surpassed the previous record IPO of $18.4 billion set by Japanese mobile phone operator NTT DoCoMo in 1998.

Displaying an unusually large gain for an issue of its size, ICBC’s shares rose 15% on their first day of trading on the Hong Kong Stock Exchange. The remarkable rise was fueled by strong demand from both retail and institutional investors. The rise came on a day when Hong Kong’s benchmark Hang Seng index actually closed lower. In Shanghai, ICBC’s domestic shares—otherwise known as A-shares—rose a more modest 5.1% from their IPO price, as the record $5.9 billion issue drained liquidity from the market. Merrill Lynch, China International Capital, ICEA Capital, Credit Suisse and Deutsche Bank were joint bookrunners for the Hong Kong share offering. About 75% of the IPO was sold to Hong Kong and global investors, and the remainder in Shanghai. ICBC exercised its so-called greenshoe option for the Hong Kong portion to issue additional shares to meet the extra demand.

Investors Line Up in Hong Kong
Despite a history of bad loans and poor management, China’s banks have appealed to investors, who lined up in Hong Kong to buy shares in the biggest financial institutions on several occasions this year. The retail portion of ICBC’s offering was nearly 300 times oversubscribed. ICBC received a $15 billion capital injection from the Chinese government last year to help it whittle down its mountain of non-performing loans to make it presentable for a public offering.

ICBC has more than 18,000 branches across China, a country of more than 1.3 billion people with a savings rate of 50%. The country’s banking sector will open to competition from foreign banks at the end of this year as part of an agreement with the World Trade Organization. ICBC was the third big state-owned commercial bank to list its shares. China Citic Bank plans to raise $2 billion by early 2007.

South Korea’s largest department store chain, Lotte Shopping, raised $3.5 billion in its IPO in February, including $2.8 billion in global depositary receipts. The GDR issue, which was listed on the London Stock Exchange, was the largest DR capital raising in history, according to Citigroup, which was appointed as depositary for the global IPO. The previous record was held by Chunghwa Telecom of Taiwan, which raised $2.6 billion in American depositary receipts in 2005.

Lotte Shopping offered 30% of its total shares in a simultaneous IPO, with common shares listed on the Korea Exchange and GDRs offered in London. In addition, the company placed some global depositary shares in Japan under a public offering without listing, or POWL, facility.

Capital raised worldwide in the form of depositary receipts by non-US companies totaled $11.8 billion in the first half of 2006, according to Citigroup. This was the second-highest first-half total ever, following the $17.1 billion record in the first six months of 2000. Asian-based companies raised $6.7 billion in the form of depositary receipts in this year’s first half, up 24% from the same period of 2005, and accounted for 57% of worldwide DR capital raised.

Foreign Markets Gain on US
The growth of foreign securities markets and financing and the withdrawal of US companies from financial ownership through management buyouts are warning signs for US markets, says Peter Wallison, a resident fellow at the Washington, D.C.-based American Enterprise Institute for Public Policy Research. “US financial markets are no longer seen as hospitable either to companies or to financial transactions,” he says.

In 2000, for example, nine out of every 10 dollars raised by foreign companies were raised in the United States, Wallison says. In 2005, nine of the 10 largest offerings were not listed in the US, and of the largest 25 global offerings, only one took place in the US. He says that the flight of foreign companies and transactions from the US signals a serious problem with excessive regulation. The United Kingdom is a strong competitor for the US, and London has emerged as the leading world financial center, even though its economy is a fraction of the size of the US economy, he notes.

Management buyout activity worldwide reached $133 billion in the first 10 months of 2006, up from $34 billon in the same period of 2005, and was the largest annual volume on record, according to Dealogic. The US was the most active country for management buyouts, or MBOs, with $95 billion, followed by the UK with $12 billion and Japan with $5 billion in the year-to-date period through October. The largest MBO deal so far this year was the $16.1 billion announced acquisition on October 9 of the remaining stake in Cablevision Systems by the Dolan family, which said it did not want to be constrained by the public markets’ constant focus on short-term results. In July, Bain Capital, KKR and Merrill Lynch Private Global Equity announced a $32.7 billion buyout of hospital chain HCA, which followed a $21.6 billion buyout of gas pipeline company Kinder Morgan in May.

Russians Are Coming to London
Meanwhile, the London Stock Exchange has continued to attract large equity listings from Russian companies in particular. LSE and AIM, its Alternative Investment Market, have seen their IPO listings increase 66% in the year-to-date through November 10 from the same period a year earlier, according to Dealogic. The total of more than $42 billion for the latest period was the largest on record. Non-UK issues more than doubled.

The world’s third-largest oil and gas pipe producer Trubnaya Metallurgicheskaya Kompaniya (TMK) raised $900 million in London and Moscow in late October. Credit Suisse, Dresdner Kleinwort and Renaissance Capital were the global coordinators. The issue was 19 times oversubscribed and valued the company at $4.7 billion. TMK selected The Bank of New York as depositary for its Regulation S depositary receipt program.

Chelyabinsk Zinc Plant, Russia’s largest zinc producer, raised $336 million in its IPO in November, giving the company an implied market capitalization of $853 million. The company, which listed GDRs on the London Stock Exchange, said it would use the proceeds of the sale to improve its efficiency and to expand its mining assets. Credit Suisse managed the issue, along with Alfa Bank, HSBC and Troika Dialog.

Russian property developer Sistema-Hals, part of conglomerate AFK Sistema, raised $432 million in an IPO that valued the company at $2.1 billion. The company listed GDRs on the London Stock Exchange and ordinary shares on two Moscow exchanges. Deutsche Bank, Nomura International and UBS were joint global coordinators for the offering.

Russian steelmaker Severstal offered fewer shares than expected in its November 8 IPO on the London Stock Exchange. The offering via Citigroup, Deutsche Bank and UBS raised about $1.1 billion for Severstal, which earlier this year failed in its bid to merge with European steel producer Arcelor.

IPOs of more than $1 billion each from Oger Telecom of the UAE and Vneshtorgbank of Russia are expected to list on the LSE in the near future.

LatAm IPOs Active
Companies in Latin America also have been active issuers of stock recently. In the biggest mining IPO of the year to date, Lima, Peru-based Hochschild Mining, the world’s fourth-largest silver producer, raised more than $500 million on London’s main market. It sold more than 77 million new shares representing a 25% stake in the company. Goldman Sachs International, JPMorgan Cazenove, Canaccord Adams and Nomura International were joint coordinators and bookrunners for the issue. Hochschild Mining has underground silver and gold mines in southern Peru and operations in Argentina and Mexico.

Brazilian real estate developer Brascan Residential Properties sold $492 million of stock for itself and a shareholder in an IPO on the São Paulo Stock Exchange. The shares were placed with institutional investors in a sale managed by Credit Suisse and UBS.

São Paulo-based Perdigao, a meatpacker that specializes in exports of chicken to the Middle East, raised $368 million in a follow-on offering managed by Credit Suisse and Itaú Securities. The global offering included American depositary shares listed on the New York Stock Exchange.

Rio de Janeiro-based Profarma, a pharmaceutical products distributor, raised $162 million in an IPO on Brazilian stock exchange Bovespa. Credit Suisse and Banco Itaú managed the sale in Brazil and to qualified investors in the US.

IPO volumes in Europe, the Middle East and Africa totaled more than $67 billion in the first 10 months of 2006, according to Dealogic. That was an increase of 49% from the same period of 2005 and the highest year-to-date volume since 2000.

German residential property holding company Gagfa raised $985 million in an IPO on the Frankfurt Stock Exchange in October that was the largest IPO in Germany so far this year. Goldman Sachs, Morgan Stanley, Dresdner Bank and Deutsche Bank coordinated the issue.

In Portugal, oil and gas company Galp Energia raised $1.15 billion in the country’s second-largest IPO ever. The Portuguese government sold a 23% stake in the company. Caixa Banco de Investimento, Espirito Santo-Sociedade de Investimentos, Merrill Lynch and Morgan Stanley handled the offering.

Gordon Platt