This was the second sale of Bank of China shares in a week after UBS divested its entire stake in the Chinese bank on December 31, raising $808 million. Observers say it is no coincidence that it is the Chinese banking stocks that are kicking off the block sales this year since they fit the criteria of what investors are looking for as they start to return to the equity market û namely large and liquid stocks. The Chinese banks have also outperformed financial stocks in most of the rest of the world on the grounds that they are more financially sound and have little exposure to subprime-linked instruments. Several substantial existing shareholders in the Big Three Chinese banks have also seen their lockups expire recently, meaning they have become allowed to sell their shares for the first time.
As is usually the case for blocks that are launched and completed before the start of trading, the CCB shares were offered at a fixed price, but the deal was still done through an accelerated bookbuild rather than on a first-come, first-serve basis to ensure the stock went to as good a group of investors as possible. By the same token, the deal was launched at 5am Hong Kong time to allow the bookrunners to include any potential demand from the US and Europe and then kept open to about 8am to also give Asian investors a chance to participate. According to sources, the deal was multiple times subscribed and attracted more than 100 investors across the three regions, including a large number of anchor orders that would have been lined up before launch û a necessary precaution no doubt for a deal this size, especially one that had to be completed in such a short time before the opening.
The deal, which accounted for 2.5% of the H-share capital and about 12 trading days, was fully underwritten by UBS with Merrill Lynch as a joint bookrunner. Merrill became a fully-owned subsidiary of Bank of America as of Monday this week when the earlier announced acquisition took effect.
Bank of America sold 5.62 billion shares, or 12.6% of its 19.9% stake in CCB, at HK$3.92 per share. The price represented an 11.9% discount to TuesdayÆs close of HK$4.45, which was in line with the 12% discount at which UBS sold its Bank of China shares a week ago. Bank of America initially tried to sell some of its CCB shares a week before Christmas and at that time the talk was of a 15% discount. However, the share price was slightly higher then, which would have made the absolute price almost the same as the price Bank of America was able to fetch yesterday.
The source noted that rather than the discount, investors were focused on the absolute price, with people starting to take interest below HK$4. Part of the demand in the book would have come from investors who were short of CCB shares, since the bank has been one of the most shorted stocks in Hong Kong in recent months. On Tuesday alone, the short-selling amounted to $140 million worth of shares or half the total turnover in the stock. A key reason is that Bank of America has been an expected seller ever since mid-November when it exercised a series of options and increased its stake in CCB to 19.1% from 10.75%.
At the time, Bank of AmericaÆs CEO Kenneth Lewis said that while the bankÆs stake in CCB is long-term and strategic, it would consider monetise part of its enlarged holding. The expectation that it would do so has been growing after Bank of America received a lot of criticism for having increased its stake in CCB û at a cost of almost $7 billion û just after receiving bailout capital from the US government.
Bank of America bought an initial 9% in CCB for $3 billion in connection with its initial public offering in October 2005. Based on the IPO price of HK$2.35 (although part of the stake was bought for less than that), the US bank would have made a profit of about $1.1 billion from yesterdayÆs sale. According to the term sheet, its remaining shares will be subject to a 120-day lock-up.
The pre-Christmas sale, which was to have been arranged by UBS, was never launched, although it is unclear whether that was due to technical reasons or a potential lack of sufficient demand at the time.
Despite the sizable discount, the stock held up well in yesterdayÆs trading. By lunch time it was down only 5.6% but was then dragged lower with a collapse in the broader market and ended 8.8% lower at HK$4.06. However, this was still 3.6% above the placement price. The Hang Seng Index fell 3.4% to its first close below 15,000 points this year.
Perhaps the resilience of CCB after the transaction was what convinced the Li Ka-shing Foundation (under the name of Magnitico Holdings) to go ahead with its sale of Bank of China shares yesterday. The timing was a bit surprising given that the market had already absorbed $3.6 billion worth of Chinese banking stocks in the past week, including $2.8 billion earlier the same day, but sources close to the BOC deal say a number of investors were still underweight the sector and this deal too ended up being well oversubscribed.
The deal was launched after the Hong Kong market closed and the order book was kept open for about three hours, attracting more than 40 investors. The seller offered 2 billion H-shares, accounting for 2.6% of the H-share capital and about four days worth of trading volume, at a price between HK$1.98 and HK$2.03. This represented a discount of 5.1% to 7.5% to yesterdayÆs close of HK$2.14. The tighter discount versus the CCB trade can partly be explained by the smaller deal size, and partly by the fact that the deal was launched on the back of a 3.2% drop in the share price during yesterdayÆs trading session (although CCB lost 4.3% the day before its placement). Even so, the more ônormalisedö discount versus the double-digit numbers that market participants have deemed to be necessary to get a deal out the door in recent months is still encouraging since it suggests some renewed confidence in the secondary market and perhaps a belief that volatility levels will come down. It may also prompt other potential sellers to go ahead, leading to a more active block market.
That said, the BOC trade was priced at the bottom of the range for the maximum 7.5% discount, allowing the Li Ka-shing Foundation to raise HK$3.96 billion ($511 million). While less than a fifth of the size of the CCB transaction, the deal was still sizeable in light of the turbulent market environment over the past 12 months. In fact, at $511 million this deal would have been the fifth largest block trade in 2008, not counting UBSÆs sale in BOC on New YearÆs Eve.
The deal was fully underwritten by Merrill Lynch, which had a busy 24 hours. Aside from appearing alongside UBS on the CCB trade, its DCM team acted as joint bookrunner on a sale of $2.5 billion worth of three-year bonds for National Australia Bank that was completed late Tuesday. Two other banks were said to have been bidding for the BOC block.
The successful completion of three placements of Chinese bank stocks in one week is bound to heat up the speculation that other investors too will take the opportunity to sell after the expiry of their lockups. Many of the pre-IPO investors are foreign banks that are in dire need of capital, making a sale all the more likely.
At the top of the rumour list of potential sellers is Royal Bank of Scotland, which owns an 8.5% stake in Bank of China that became eligible for sale on December 30 û the same day that UBS was allowed to sell its shares in the same bank. Temasek holds a 4.8% stake in the same bank.
Meanwhile, towering on the horizon is the expiry on April 28 of the lockup of half of Goldman SachsÆ pre-IPO stake in Industrial and Commercial Bank of China. The US investment, which has a strategic cooperation with ICBC that will remain in place until January 2011 and one seat on the board, owns 16.6 billion shares, or 20% of the H-share capital, of which 16.5 billion were bought before the IPO. On the same date, Allianz and American Express will also be allowed to sell half of their pre-IPO stakes, which amount to 6.4 billion and 1.3 billion shares, respectively.
Warren Blight, a banking analyst with Fox-Pitt Kelton, agrees that there are potentially more sales to come. However, he doesnÆt believe that foreign banks will be selling en masse.
ôThis will be topical for a while, but I donÆt see existing investors getting rid of everything. Most of them would want to retain a strong relationship with the Chinese banks,ö he says, noting that Bank of America will still own about 17% of CCB after yesterdayÆs sale. However, foreign banks with balance sheet issues may take the opportunity to secure some profit on their investments in Chinese banks, he adds.
¬ Haymarket Media Limited. All rights reserved.
