Best Overall Equity Deal / Best Privatization / Best IPO
China Unicom $5.65 billion privatization
China International Capital Corporation, Morgan Stanley Dean Witter
For Asia's equity markets, the year 2000 belongs to the Chinese privatization programme, with three equally landmark deals - Petrochina, Unicom and Sinopec - competing for one award. As the largest of the three and the one that fully encapsulated renewed momentum towards the Mainland's growth story, Unicom wins by a nose. The deal also stands clear because of the flawless execution that helped it enjoy an easier and more successful passage through the primary markets than its most immediate predecessor Petrochina, which became a flashpoint for WTO negotiations.
To lead manager Morgan Stanley's credit, this smooth ride was by no means certain when the deal was finally launched in late May. It had already been postponed once the previous year because of the fallout from having to unwind its foreign joint ventures. In the immediate run up to roadshows, the company had also been plagued by a series of negative articles concerning: regulatory favouritism towards China Mobile; internal management squabbles and; contradictory signals about which technology the company would be using for its 2G and 3G networks.
The general market backdrop was also far from ideal, with a number of global deals such as Vodafone Pacific being pulled. The bank, however, remained convinced that as long as it could change investors' perception of the company, overall market conditions would remain of secondary importance.
Following a similar strategy to one used for China Mobile at IPO in 1997, it was decided to go out with a relatively wide and conservative price range that could be revised upwards subject to the generation of sufficient momentum and hence demand. "We wanted to eliminate any possibility of execution risk," said Asian ECM head Colin Stewart at the time. "We wanted investors to feel comfortable that here was a deal that was definitely going to get done no matter what."
With market conditions starting to move in the company's favour and China Mobile's share price rising 26% during the course of roadshows, the approach paid off and the indicative range was pushed up. Unlike either Petrochina or Sinopec, which relied heavily on the world's oil super majors to fill their books, Unicom had just one strategic investor, Hutchison Whampoa, which took up $400 million.
Large buying, particularly by index funds, ensured that institutional books closed four times oversubscribed and the deal was subsequently priced just below the top end of its revised range in order to give secondary trading an initial lift.
The largest IPO in Chinese history, Unicom also represented the largest domestic IPO in Hong Kong since retail and institutional offerings were split apart in 1993 and at the time, Asia's largest equity offering outside Japan. As Stewart concluded, "China Unicom is a hallmark example of what a government should do. How an attractive growth story and impressive management can win the day."
Best Overall Bond Deal / Best Non-Investment Grade Bond Deal
Hanvit Bank, $850 million subordinated debt
Few deals deserve the epithet of being described as remarkable, but Hanvit's upper and lower tier 2 debt transaction is undoubtedly one of them. The ten, non-call five deal marked Asia's first international bond offering of the year and at year end, it still stands as its most significant. Indeed Asian bank subordinated debt has become such an integral part of the region's fixed income landscape that it is almost hard to appreciate just how groundbreaking the deal was at the time of its launch in mid-February.
The first ever issue of upper tier 2 debt by a non-investment grade bank globally, the deal also represented only the third instance of publicly issued lower tier 2 debt from the same credit class. Prior to Hanvit, there had been just two $100 million issues by Korea's Cho Hung Bank and Slovakia's Vseobecna Uverova Bank, plus a couple of private placements by Japanese banks.
No issuer before had ever attempted to raise funds in such size, however and few were sure whether enough investors would be prepared to move down the credit curve to support it. Even if they did, many observers thought that the smell of blood might tempt investors to push pricing to levels that Ba2/BB rated Hanvit would be unable to bear.
For the bank itself, a deal was borne out of the necessity of rebuilding capital ratios that had been decimated by the financial crisis. Shut out of the equity markets by a share price trading below par value and the domestic debt markets by high local interest rates and a stunted yield curve, Hanvit believed that the international debt markets offered some slim hope.
JP Morgan's chief skill lay in marketing the deal as leveraged exposure to the sovereign, which owned 75% of the bank. In Hanvit, investors sensed a high yielding instrument that might replicate the previous year's massive spread tightening across the Asian credit spectrum. A total of 110 investors consequently bought into the deal, with 10 placing orders above the $30 million mark.
Following pricing at 612.5bp over Treasuries for the upper tier 2 tranche and 580bp over for the lower tier 2 tranche, a new asset class had been created for emerging market borrowers. Sadly by year-end, the proceeds failed to be enough and the country's second largest commercial bank by assets was told by the FSC that it would be merged into a government holding company alongside Peace Bank, Kwangju Bank and Cheju Bank. Likewise, the hoped for spread contraction failed to emerge, with both tranches trading wider.
Nevertheless, the transaction remains almost universally praised by market observers. "It is hard to understate the true importance of this deal to Asia," one official concluded at launch. "It was a deal which had to work and it had to be seen to work well. This it has done."