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Best Secondary Offering

Chartered Semiconductor, $1.01 billion secondary offering

Salomon Smith Barney

The world's third largest foundry manufacturer was responsible for South East Asia's only transaction above the $1 billion mark this year and managed to pull it off against one of the most volatile backdrops of a volatile year. For lead manager Salomon Smith Barney, the deal marked a real test of its execution abilities.

Faced with a stock that was bouncing around by up to 8% on a daily basis, the lead manager also had to contend with a number of selling shareholders all with slightly divergent interests As one specialist TMT fund manager reviewing the year puts it, "It was far and away one of the most difficult deals to do. Because Chartered is not the industry leader, it's also not a must hold in the same way that China Mobile was when it came later in the year. Salomon did a very good job getting that thing out."

Key to making the ADR and share placement a success was finding the right market window and making sure the stock held firm in immediate secondary trading. Where the former was concerned, the Nasdaq suffered its largest one-day point loss in history mid-way through roadshows, dropping 12.1% on April 14.

The deal was consequently put on hold and then revived again on May 2 after global markets showed signs of stabilizing. To minimize execution risk, Salomon opted for an accelerated bookbuild and reduced the issue size slightly. Hence, while Chartered proceeded to issue 78 million primary shares as intended, Singapore Technologies, cut back its secondary share sale from 90 million shares to 50 million in the process reducing its stake from 70.1% to 62.6%.

By this point, however, a handful of strategic investors that had bought into Chartered's October 1999 IPO, were out of their lock-up period and free to sell their 710,000 shares on the open market. Persuading them that it was in everyone's interests to stay in the deal and work together proved to be another of the deal's major accomplishments

What proved even more problematic was making sure that the stock held at its $65/S$11.20 placement price, since Singapore forbids stabilization of secondary offerings. Salomon accordingly decided to price the deal after Singapore's close and stabilize it through Nasdaq. Market participants believe that over the first weeks, it then actively and aggressively stabilized through its own book and to the tune of up to $100 million.

As Scott Ferguson, Salomon's head of ECM commented at the time, "The dual offering structure alleviated the problem somewhat, since stabilizing across Nasdaq had an indirect impact upon the SGX, as arbitrage narrowed any discrepancies in the pricing on the two exchanges." Careful placement not only ensured that the greenshoe was later exercised, but also helped keep the stock above its $65 placement price until September, when it began to crumble alongside the whole sector.

Success meant that Chartered had achieved its twin objectives of securing MSCI inclusion and raising funds for a new Fab. The first of the big three semi-conductor deals from Asia over the course of 2000, the issue also set a new record for Singapore, where it represents the largest secondary offering to date and the second largest equity offering.

For fund managers, Chartered also stands out as one of Asia's more transparent and open companies. "For me what I remember most clearly was the sophistication of it marketing pitch," one account recalls. "The way they positioned themselves as a leader in the communications equipment market was very impressive. At the time it was the right thing to do and although the whole sector's now fallen out of bed, investors will come back to the company when the sector revives, because they will remember Chartered's R&D expertise."

 

Best M&A Deal

PCCW's acquisition of Cable & Wireless HKT

  • Bank Of China, CSFB, UBS Warburg  Advisors to PCCW     
  • Chase Fleming - Advisor to HKT     
  • Merrill Lynch, Greenhill  Advisor to Cable & Wireless     
  • ING Barings  Fairness opinion     
  • Salomon Smith Barney  Advisor to board of PCCW's Singapore parent     
  • Morgan Stanley Dean Witter - Advisor

PCCW's acquisition of Hong Kong phone company, C&W HKT is the most significant M&A transaction of the year. It broke Asian records in terms of size. It also broke the mould in terms of audacity  we had a well-established, ex-monopoly telecom company being bought by a company riding the speculative internet wave and yet to make a cent of profit.

From the acquirer's point of view, this was a fantastic deal. PCCW's boss Richard Li managed to use his bubble stock to buy one of Hong Kong's great assets. And more credit to him for his clever financial engineering.

His strategy was brilliant. In the midst of a tech mania, he talked everyone round to his vision and saw his stock soar. He knew, however, that this may not last forever and when SingTel's bid for HKT hit political problems  Beijing was allegedly not happy about it  he came in as the well-connected white knight. Using his personality (and one must imagine his genealogy) he managed to amass $12 billion of leveraged finance from banks in a matter of days.

He was also clever enough to see that this deal would be fought out in the newspapers and research reports, and above all by the opinion and good graces of analysts and investment bankers. So he ensured that almost no bank was able to give an independent view on the deal  they were all working on it in some shape or form.

From a banker's perspective this was definitely the M&A transaction of the year as the fees paid were so enormous. For only four months or so of work, a fee pool of around $130 million is thought to have been up for grabs. Compare that to the typical deal in Korea that takes 18 months to do, nearly kills you and has disputed fees at the end.

Undoubtedly this was the jackpot deal of the year for bankers and Richard Li, but what of investors? One must say that since completion, the stock price of PCCW has collapsed. And as for Cable & Wireless's shareholders, they entered into a deal that started as a $38 billion transaction and ended up at $28 billion and could still end up as less. But it was the Cable & Wireless people who approved the sale of the business to PCCW in the first place. This is one of those deals that was not a win-win situation for everyone Yet what it represented was so significant that it has changed the possibilities of Asian M&A forever.

 

Best Investment Grade Bond Deal

MTR Corporation, $600 million global bond

Goldman Sachs, HSBC, Merrill Lynch

The year 2000 may have proved thin pickings in Asia for the international debt markets, but those deals that have been launched, have in the main been well executed and well received. And none proved the case more effectively than the $600 million bond offering by the MTR Corporation.

Long considered Hong Kong's proxy sovereign borrower, the A3/A-rated credit has traditionally vied with China in being able to maintain the tightest spread levels among non-Japan Asia's sovereign credit spectrum. Consequently, getting a deal right for the group is not so much a matter of resolving particular credit issues, but making sure timing is perfect.

The group's subsequent 10-year offering in early November was, in this respect, a text book example of how to complete a swift, smooth and successful transaction for borrower and investor alike. Launched in the space of 48 hours, it caught a narrow issuance window in unstable markets and provided MTR with a successful endnote to its recent partial privatization. Indeed, the final decision to proceed was literally taken the day before the three lead managers and Finance Director Clement Kwok headed off to New York for pricing.

This ability to dispense with formal roadshows was largely the result of careful credit and investor relations work over the years, which paid off in spectacular fashion when the group needed to act decisively.

However, what really sets the deal above its peers this year is the fact that it was able to price flat to its outstanding issues without any need for a new issue premium. This is even more impressive as the deal launched in the face of weakening single-A rated spreads, particularly in the telecom sector. Indeed, one of the main lessons MTR had learnt from its last deal of January 1998 was the importance of securing a regional backstop bid that could act as a counterweight to the Asian pricing premium still often demanded by US accounts.

For the three leads, the deal also underscored MTR's loyalty to those banks that have served it well in the past. Each describes their pride in the fact that the train operator keeps coming back. Further testament to the deal's success was its immediate secondary trading record. Where Hong Kong/China spreads had been fairly range-bound for some months, MTR's success pulled the whole credit curve in between 2bp to 5bp over the following day.

 

Best Local Currency Bond Deal

Export Import Bank of Thailand, Bt5 billion bonds,

HSBC, Thai Farmers Bank

The development of the Thai local bond market has been outstanding this year. And so it is not surprising that the best deal of the year should come from this country. The Bt5 billion ($125 million), split 3-year, 5-year bond deal for the Export Import Bank of Thailand (Thai Exim Bank), showed how sophisticated the local market has become. It also showed how a difficult financing challenge could be turned into an outstanding deal through the informed use of the local capital markets.

Initially, Thai Exim Bank needed to raise around $150 million in the international markets to refinance its maturing, offshore debt. This would have cost around 170 basis points (bp) over Libor if the deal was done through the loan markets, and considerably more if the money was raised through the international bond markets.

However, the lead managers of the bond deal - Thai Farmers Bank and HSBC - recommended to Thai Exim that they raise funds in the Baht bond market and then swap the proceeds into US dollars. This therefore allowed the borrower to create a synthetic dollar liability while selling the credit onshore, taking primarily Thai baht risk. The timing of the deal and momentum created through the marketing allowed this structure to happen. Because the swap market was liquid and Baht interest rates were low, the issuer managed to achieve equivalent sub-Libor pricing.

In the end, over 20 investors came in for the bond at an aggressive yield of 70bp over government bond yields. The investor group comprised a mix of pension funds, banks and domestic insurance companies. The three-year, Bt3 billion tranche was one and a half times oversubscribed, while the Bt2 billion, five-year tranche was two and a half times oversubscribed. Once the swap had been priced in, Thai Exim Bank had raised dollar funds at Libor minus 70bp.

This was a hugely price efficient deal which showed that with the right market timing, the local markets can be as good for the issuers as the international markets. Moreover, it solved a specific financing need for the issuer in a way that greatly enhanced Thai Exim's balance sheet. Sold at a price of 100%, the bonds carry a coupon of 5.1% for the three-year tranche and 6% for the five-year tranche. Moody's rates the issue at Baa3.

 

Best Project Finance Deal

CBK Power Project

BNP Paribas, DKB, IBJ, SG Asia

The CBK power project in the Philippines is a fine example of how to finance a project which has a strong rationale but is hampered by external factors. The $383 million deal is the first project financing in Asia completed based almost entirely on extended political risk coverage from the private insurance market. In the process, the deal became the largest private political risk covered project financing in the world with nearly $580 million of insurance covering both principal and interest.

CBK is a build-rehabilitate-operate-transfer power project developed as an unsolicited project under the Philippine BOT law. Edison Mission Energy and Industrias Metalurgicas Pescarmona of Argentina are the sponsors.

It involves the construction of one new 350MW hydroelectric plant (Kalayaan II) and the rehabilitation of three existing hydroelectric plants (Caliraya, Botocan and Kalayaan I, hence CBK). The project will provide stable power for the notoriously infallible Luzon grid ending such events as the famous jellyfish blackout of 1999, where jellyfish blocked the Sual II plant causing 18 hours of power failure.

The overall financing coordinator of the deal was SG Asia, which also coordinated the political risk insurance and ran the books on the financing. BNP Paribas was instrumental in technical and insurance matters, while DKB ran the modeling and IBJ helped lead the bookrunning. International legal advice came from Milbank, Tweed, Hadley and McCloy and local legal advice came from Picazo, Buyco, Tan Fider & Santos.

Total debt came to $383 million and comprised a $351 million political risk insured facility, with a $20 million debt service reserve and a $12 million performance security facility. The sponsors provided $137 million in equity.

The groundbreaking aspect of the financing was the level of private sector political risk cover that the arrangers managed to take out. It covered the usual political risks of appropriation and war and so forth but also covered the risk of Napocor not paying the off take agreements and in turn the Republic of the Philippines not paying Napocor's debt if they did not pay. AIG, Zurich and ACE Syndicate from Lloyds of London led the insurance syndicate. It was the most comprehensive private insurance package ever assembled.

Remarkably, for a deal where the defining feature was the level of political risk insurance, the financing was syndicated at a time when confidence in the administration of the Philippine Government fell apart, both at home and abroad. Spreads on Philippine bonds were ballooning and the peso was sliding headfirst to its lowest level in years. In the end syndication closed 30% oversubscribed with 14 other institutions coming into the fully underwritten transaction. It took little over six weeks from launch to closing of the financing, showing that with a strong project rationale, strong risk mitigation and strong support from the sponsors, ground-breaking projects can still be financed in Asia.

 

Best Equity-Linked Deal

Hutchison Whampoa, $3 billion Vodafone Exchangeable

Merrill Lynch

The three-year transaction not only ranks as the standout deal in its category, but across the wider capital markets as well. Within the space of its accelerated, 10-hour launch period on September 11, the issue managed to completely re-define the Asian equity-linked market and re-shape the kind of pricing levels available to the region's top borrowers.

For most of its history, the sector has suffered something of a reputation problem in the eyes of global investors. Too often in the past, boom/bust cycles have been engendered by a preponderance of second tier issues jamming the market with mis-priced deals that fail to withstand the next market downturn.

Hutchison, by contrast, may have marked a turning point and the longed-for arrival of Asia's tier one companies. Indeed, lead manager Merrill Lynch has since argued that its key achievement was to bring global pricing standards to an Asian deal and show one of the region's most highly esteemed companies that an equity-linked transaction could provide a cost-effective addition to its fund raising arsenal.

Where, for example, a bond floor of 90 to 95 would have previously been the norm to appease investors hoping to mitigate downside risk, Hutchison achieved an 87 level in line with European pricing levels. So too, where a conversion premium of 15% to 20% had been standard, Hutchison achieved a 32.5 % premium to London's close on the day of pricing - the highest on record for a company in the region.

Three times the size of its nearest rival, the transaction is Asia's largest by some margin and in a global context, ranks as the second largest dollar denominated transaction on record and the largest ever underwritten transaction. For Hutchison, an exchangeable structure enabled the company to monetize part of its Vodafone stake in a fashion that either allowed the stock to be sold at a significant premium should the deal be converted, or achieve $3 billion of funding at about one-third of its borrowing costs in the straight debt markets.

According to the lead, a bond floor of 87 saved the company about 5% of its usual borrowing costs, or about $150 million in interest savings per annum. By contrast, a bond floor around the 95 level would have saved 1% to 2%.

For investors, the transaction appealed because it married Hong Kong's strongest credit with Europe's most prominent and heavily traded wireless stock. Bond investors liked the shortened, three-year maturity since this gives issues more of a fixed-income tilt, while for large holders of Vodafone stock it offered a defensive hedge.

Where Merrill Lynch won most plaudits, however, was for its execution capabilities. One of the key considerations to make such a large transaction work was to ensure that delta hedging would not be a destabilizing influence on the stock at launch.

To counter the expected volatility and comfort the market, the bank consequently decided to launch an Accelerated Global Tender (AGT) of $500 million borrowed (secondary) Vodafone stock simultaneous to the exchange. Marking a first for both Asia and Europe, the move placed a short in the market that enabled investors to hedge without exerting additional pressure.

The deal was formally closed as New York opened, leaving unsatisfied demand to filter through to the secondary market, where the deal immediately traded up to 101.45.

With proceeds adding to Hutchison's growing cash pile, the deal further cemented a trend that is becoming increasingly evident in Europe, where exchangeables have become a popular means to dispose of unwanted stock created by the massive wave of corporate restructuring taking place across the Continent.

Rather than sit on a passive stake, Hutchison decided that it would be able to generate higher returns from investing the proceeds in its own 3G projects. As Ajmal Rahman, Merrill's Asian head of ECM, concluded at the time: "It's all about being well positioned to take advantage of opportunities in an exciting sector where the landscape is continuously being re-drawn."