BoCom steals lead on rivals with $4.84 billion rights issue

Bank of Communications, China's fifth largest lender in terms of assets, has stolen a lead on several of its larger Chinese rivals by announcing details of a rights issue that could raise up to Rmb33.071 billion ($4.84 billion). The offering, which will be targeted at holders of both its A- and H-shares, will kick off immediately with Thursday being the last trading day when investors can buy the H-shares if they want to gain access to the rights.

The timing is somewhat surprising since most market watchers had expected that the only bank that would be allowed to issue new shares ahead of Agricultural Bank of China's massive initial public offering in July would be Bank of China -- and even its offering was considered a possibility only given the continued volatility in global equity markets. With a fundraising target of above $22 billion and the backdrop of a shaky market, Agricultural Bank will need the full attention of investors and would not want to be competing for orders with other Chinese banks -- particularly since the others already have established track records as listed entities.

That said, Bank of Communications, or BoCom as it is known, did announce its plans for a rights issue already in February and the fact that it is also the first to receive the final go-ahead from the Chinese regulators suggests that perhaps the market has put too much into the belief that Beijing would want to control -- and stagger -- the timing of the upcoming fundraisings by its largest lenders.

However, BoCom's share sale is quite small relative to the share sales planned by ICBC, Bank of China and China Construction Bank, which have indicated that they may raise a combined $31 billion over the next few months, and as a result may not be seen to hamper the potential demand for Agricultural Bank.  

The Chinese banks need fresh capital after an unprecedented credit binge last year and to ensure they can continue to grow their loan books and still adhere to the government's capital requirements. BoCom said in a statement on the Hong Kong stock exchange website last night that the purpose of the rights issue is to strengthen its capital base and improve its core capital adequacy ratio, but didn't provide any details.

The bank will offer 1.5 new shares for every 10 existing A- and H-shares at a price of Rmb4.50 per A-share and HK$5.14 per H-share. The price for the two share classes are approximately the same after adjusting for the exchange rate.

The H-share price represents a 37.2% discount to Friday's closing price of HK$8.19 and a 34.0% discount to the theoretical ex-rights price (Terp) of HK$7.79, based on the same closing price.

The rights issue will account for 15% of the outstanding share capital and will be split proportionally between the Shanghai-listed A-shares and the Hong Kong-listed H-shares. Based on the number of outstanding shares, BoCom will issue about 3.89 billion new A-shares and 3.46 billion new H-shares.

HSBC, which owns 19.01% of BoCom, has committed to take up its entitlement in full, which means it will buy 40.7% of the H-share offer. Meanwhile, BoCom International, BoCom's investment banking arm, will cover the 37.1% of the H-share issue that corresponds to the National Social Security Fund's entitlement, should the Chinese fund decide not to take up its shares in full. The remaining 22.2% of the rights issue will be fully underwritten by Goldman Sachs (18%), HSBC (18%), BoCom International (13%), Citic Securities (18%), Bank of America Merrill Lynch (8%), BOCI Asia (6%) and BNP Paribas (6%).

The A-share portion of the rights issue will not be underwritten, but Haitong Securities and UBS Securities are acting as lead sponsors. As per Chinese regulations, the sale will only go ahead if the subscription level is equal to least 70% of the A-share rights issue. If the subscription ratio is above 70%, any rights not taken up above that level will lapse.

The record date for the H-share issue will be June 18 and a prospectus will be issued on June 24. Shareholders who don't wish to buy more shares can trade the rights between June 28 and July 6 and the rights offer will close on July 9.

The A-share issue will run ahead of the H-share portion with a prospectus due to be issued today and the record date set for June 9. The lead sponsors will start to accept order on June 10 and the offer will close on June 21.

The announcement of BoCom's rights issue comes after Agricultural Bank on Friday evening essentially confirmed that it will ignore the challenging market environment and go ahead with its record-size dual-listing IPO in Hong Kong and Shanghai in early July by posting a Chinese-language prospectus on the securities regulator's website. According to various media reports, the bank intends to sell 15% of its share capital in the form of 22.235 billion A-shares in Shanghai and 25.411 billion H-shares in Hong Kong.

The H-share portion of Agricultural Bank's offering is being arranged by China International Capital Corp, Deutsche Bank, Goldman Sachs, J.P. Morgan, Macquarie and Morgan Stanley, as well as the bank's own Hong Kong-based investment banking arm, ABC International. The A-share portion is being arranged by CICC, Citic Securities, China Galaxy Securities and Guotai Junan Securities.