2010: Back in growth mode

If 2009 was a year of recovery, 2010 in Asia was all about growth. Capital markets records fell from South Korea to India as companies and governments rode the wave of enthusiasm for emerging markets, and local currency bonds blossomed as quantitative easing weighed on the US dollar.

China’s overseas march, however, would prove the most significant, as Agricultural Bank of China’s giant IPO and the first Dim Sum bonds confirmed the enormous depth of international demand for the country and its currency. Asian investors also proved they could support high valuations, as in the case of insurance group AIA, attracting the attention of other global issuers.

IFR Asia 665 – September 11, 2010

RoP hits sweet spot with Asia’s first local currency Global

The Republic of the Philippines on Thursday night launched its first peso-denominated Global bond, the first of its kind in Asia, to a hugely enthusiastic response from international investors.

The US$1bn-equivalent SEC-registered 10-year, which is settled in US dollars, was more than 13 times oversubscribed as investors jumped at the chance to book exposure to both the credit and the currency.

It also came inside a key domestic benchmark, allowing the government to lower its cost of funding while at the same time diversifying its investor base.

“This deal has been pitched to them for many years. They took a leap of faith and that has been rewarded handsomely,” said one banker on the deal. “The Philippines managed to raise Ps44bn (US$1bn) – five times the size of the average auction – and still achieve pricing inside the domestic market, net of the withholding tax,” he added.

Citigroup and Deutsche Bank were the global coordinators. Citi, Credit Suisse, Deutsche, Goldman Sachs, HSBC and JP Morgan are joint bookrunners.

In one fell swoop, the Philippines succeeded in raising US$1bn equivalent and yet achieved pricing inside the domestic secondary bond market. Its cost of funding was ultra competitive: The 5% yield on the peso Global was the lowest ever paid by the Philippines for a US dollar or a peso bond.

The Global priced at the tight end of the 5.00%–5.25% final guidance and well inside the initial 5.25% area whisper. It came at a 23% discount to the 10-year benchmark PDST-F (the most common reference rate for domestic bond issues) which was at 6.4781% on Thursday. Net of the 20% withholding tax, the peso Global still came at a discount of about 3%.

“The Philippines is one of the more difficult countries in Asia to buy domestic currency bonds, due to the high withholding tax rate, which is why foreign ownership of local bonds has remained miniscule, compared to other jurisdictions like Indonesia, where foreign ownership of domestic bonds is around 28%,” said Rajeev de Mello, head of Asian investment at Western Asset Management.

By timing the deal as it did, the Philippines hit a sweet spot and was able to capture pent-up demand for Asian bonds amid a low-rate environment. With the fiscal outlook for European and the US economies still shaky, emerging market funds are scouring the globe to deploy capital and are hungry for exposure to Asian emerging market bonds.

IFR Asia 671 – October 23, 2010

Coal India a true blockbuster IPO

Coal India’s Rs155bn (US$3.5bn) IPO – the largest public listing in Indian history – lived up to its billing last week as books closed 15 times oversubscribed. The Indian Government’s biggest divestment this year attracted orders worth an impressive US$52.5bn, a record in the domestic market.

“It clearly shows to the Indian government that, if it wants a successful deal, it should not be greedy with the valuations. Leave something on the table and the market will more than welcome it,” said one banker.

Coal India’s success is being mainly attributed to a proper marketing strategy which involved meeting institutional investors across the world. That helped in building familiarity with the company’s underlying business. More importantly, bankers said the stock was valued correctly in comparison with its peers. According to Reuters, at the top of its Rs225–Rs245 price range, Coal India would be valued at 15.7 times trailing earnings. China’s Shenhua Energy trades at 16 times trailing earnings, while Indonesia’s Adaro Energy has a ratio of 20 times. US miner Peabody Energy trades at 25 times earnings.

The strategy to focus on making institutions comfortable also helped to create momentum for the deal. The qualified institutional book (which closed on October 20, a day before the retail book) was covered 24.7 times, with orders for 7.01bn shares compared with the 284.2m on offer.

The non-institutional book, which was an offer of 85m shares, was about 25 times covered, while the retail tranche of 198.96m shares was a more modest 2.3 times subscribed – although that represented an astounding 1.8m applications.

The bookrunners for the Coal India IPO were Citigroup (left lead), Bank of America Merrill Lynch, Deutsche Bank, Enam, Kotak and Morgan Stanley.

IFR Asia 671 – October 23, 2010

AIA wraps up jumbo float after surprisingly strong demand

Bailed-out US insurer AIG finally completed the Hong Kong listing of AIA last week after a surprisingly strong response from investors. The HK$138.3bn (US$17.8bn) deal rewrote IPO records and banished memories of the failed sale of AIA earlier this year.

The strength of demand surprised many, coming after shareholders of UK insurer Prudential had rejected the company’s attempts to acquire AIA.

But thanks to the decent market backdrop – with the global equity markets holding up during AIA’s roadshows – and, more importantly, the generous pricing of the deal, the transaction attracted overwhelming demand from investors. Institutional investors put in orders worth US$116bn, covering the institutional book almost eight times. The retail portion was 9.6 times covered.

Like many other jumbo Hong Kong IPOs, AIA’s float drew strong interest from Chinese names, including sovereign wealth fund China Investment Corp, Chinese corporations and also domestic institutions under the QDII scheme.

However, the deal also attracted unusually strong demand from Asian private banking and corporate investors, which accounted for US$40bn of AIA’s book, or about 34% of the total institutional demand.

The keen participation from corporate investors was mainly a result of the reasonable pricing, said a banker. Investors had expected AIA to be valued in the low-to-mid US$30bn range, but, even at the top of the HK$18.38–$19.68 price range, the market valuation came to US$30.55bn, or 1.32 times 2011 embedded value.

That is roughly in line with Prudential’s revised bid of US$30.3bn, which AIG’s board had rejected as too low. This valuation prompted at least some investors to place early orders.

There were more than 1000 investors in the book. Geographically, Asia accounted for 53% of the demand, the US 30%, Europe 9%, the Middle East 6% and Japan 2%. Shares of about US$400m were finally allocated to the Japanese POWL tranche.

AIA fully exercised the upsize option, increasing the base deal size by 20%. At US$17.8bn, it is already the largest-ever listing in Hong Kong, surpassing the US$16bn Hong Kong tranche of ICBC’s IPO in October 2006.

AIA’s IPO is also the largest-ever insurance listing globally and is heading to be the third-largest global IPO of all time if the greenshoe is exercised.