In one of those oft-repeated vagaries of Asian investment banking, Cathay Financial Holdings has awarded the mandate for its $1 billion convertible bond offering to Goldman Sachs in favour of its house bank JPMorgan.
The news is likely to have come as an extreme surprise to JPMorgan which has enjoyed a particularly close and fruitful partnership with the Cathay group over the past year. Indeed, clients often accept that investment banks work for lower fees on M&A and ratings advisory in anticipation of balancing this out with higher capital markets fees. In this instance, the US investment bank acted as ratings advisor for the forthcoming convertible and successfully completed all the M&A work associated with the creation the financial holding company structure.
Goldman, on the other hand, is likely to view the mandate as a major coup. Having recently become noticeably more aggressive towards capturing the flow business of the active North Asian equity markets, the Cathay deal also further serves to underline a historically strong presence in Taiwan where it now holds the two largest convertible mandates on record (Cathay and CDIB Holdings), plus the largest outstanding mandate in the straight equity pipeline (Hon Hai).
Traditionally Asian banking clients have often been wary of awarding mandates to banks that work for a perceived rival. Goldman, however, is likely to argue that there is no conflict where Cathay and CDIB Holdings are concerned, since the former's revenues are very heavily dominated by insurance and the latter's by asset management.
By contrast, rivals may note that some overlap is inevitable since both deals are likely to come to market almost in succession. And although there is no official talk on timing, it seems likely that CDIB Holdings will come first since a domestic filing is already believed to have been sought.
The deal is set to raise $600 million and brings the tally of potential and executed deals from the Taiwanese financial sector up to almost $2 billion. Fubon Financial Holdings led the charge with a $375 million offering (plus $45 million shoe) via Credit Suisse First Boston and Salomon Smith Barney at the beginning of this month. Alongside Cathay and CDIB, Taishin is also preparing a $250 million convertible, which has not yet been mandated and market participants also believe that Bank Sinopac will follow suit once it transforms into a financial holding company in the middle of May.
According to DBConvertibles.com, a total of 35 issuers from Taiwan have current outstandings of roughly $5.3 billion. This means that the financial sector convertibles should add a further 50% to outstandings within the next quarter and even more if only liquid outstandings are taken into account. But specialists believe that a huge asset swap bid out of Taiwan in combination with international demand for larger and more liquid deals will ensure that all meet a warm reception.
Cathay Life is regarded by many as the prized mandate not only because of its size but also because of its exceptionally strong credit profile. The insurance arm Cathay Life has already been awarded an AA- rating from Standard & Poor's and although most holding company ratings would typically come three notches lower than this (A-), Cathay may yet secure a higher rating because insurance contributes over 90% of group revenues. Should this be the case, the deal will represent the highest rated benchmark in the entire credit spectrum for Asian banks.
S&P analyst Connie Wong says that domestic insurance ratings are underpinned by the extremely conservative reserve requirements imposed by the Taiwanese government. "Regulatory requirements are very prudent," she explains. "In many jurisdictions, the reserve ratio is only calculated on the surplus after total liabilities (policies) are deducted from total assets. In Taiwan, the reserve ratio is calculated on a per policy basis."
The government also recently lowered the maximum guaranteed rate on reserving to 4% in a move that is likely to aid Cathay because it will stop rivals trying to eat into its market share by offering policies with uncompetitively high guarantees. Before the amendment was introduced, the company had seen its market share fall from 50% to 30% over the space of a decade, although it still remains the market leader.
"In the past, the only difference between various policies was price," Wong adds. "Now companies are going to have to try and compete with Cathay by differentiating themselves with new products."
However, while the Cathay deal has extremely strong fixed income profile, domestic analysts say that the equity story is less appealing than Fubon because Cathay has not been as successful in creating a platform which will allow it to cross-sell insurance products across a commercial banking franchise (Cathay Bank has a 1% market share).
Nevertheless, based on Tuesday's closing share price of NT$50.5, Cathay is still trading below embedded value (current book value plus cash flow from policies already written). Just prior to the completion of the holding company structure, the company announced an embedded value of NT$269 billion to NT$295 billion and has a current market capitalisation of NT$294.8 billion.
Analysts say that European life insurers typically trade at 1.2 to 2 times embedded value.
