Following a domestic filing for an issue size of up to $400 million, launch is expected to take place by the end of next week under the dual lead of Credit Suisse First Boston and Salomon Smith Barney. Should the full amount be raised, the transaction will represent the largest ever from the Island Republic and will be similar in structure to a recent and highly successful $302 million benchmark deal from UMC, currently the second largest on record.
Both issues are backed by Treasury shares rather than common stock and in Fubon's case the structure has been devised as a way for the company to finally unwind the cross share holdings, which underpinned its structure prior to re-organisation as a financial holding company in December 2001. The group has been given an SFC deadline to resolve the issue of the legacy shares, which are still sitting in the five main operating subsidiaries (Fubon Insurance, Fubon Life, Fubon Securities, Fubon Commercial Bank and Fubon Securities Investment Trust).
An equity-linked structure is an obvious tool to enable the Treasury shares to be issued back out into the market. The presence of CSFB and SSB as lead managers also reflects both banks' close relationship with the Fubon group and the Tsai family who are reputedly Taiwan's richest. CSFB, for example, was the group's merger advisor under the aegis of former investment banking head David Olson, while SSB owns 15% of the newly formed holding company and is developing joint insurance operations throughout the rest of Asia via a 50/50 joint venture, Citi-Fubon.
Fubon is a key client for both banks and its prospective deal should also provide an interesting new benchmark for Taiwan, where issuance is almost exclusively tech-related and relatively small in size. The combination of strong credit ratios, rarity value, corporate brand name and size are, therefore, expected to play extremely well with an investor base which has shown strong interest in deals that provide diversification from the tech sector.
Key to success, however, will be how the credit market perceives the group. Because Treasury shares will back the issue, there is likely to be a very short-dated structure, with a final maturity of 2.5 years or less. This is because under Taiwanese law, companies cannot issue dividends into Treasury shares.
A new rating has not yet been assigned to the holding company and the only operating company with a rating is Fubon Insurance, the flagship of the whole group, which has an AA- rating from Standard & Poor's. Typically a holding company with only one insurance subsidiary would be rated about three notches lower. Where Fubon is concerned, the overall rating is likely to fall another two notches below this level because Fubon Commercial Bank and Fubon Securities are considered weaker credits.
Observers believe the group will obtain a mid triple B rating, either one or two notches below UMC, which is rated BBB+ and is currently bid at 195bp over Libor in the asset swap market for its March 2004 issue. But a number add that Fubon may be bid tighter because of strong credit demand, particularly offshore where issuance from the Taiwanese banking sector has been almost non-existent, but highly sought after.
The last deal, which could be considered any kind of benchmark at all was issued in April 1998 when Chiao Tung bank raised $300 million in subordinated debt through a step-up structure, which paid 65bp over Libor for years one to five and 300bp thereafter. Prior to this, Bank of Taiwan issued a $200 million FRN in 1996 via Goldman Sachs at 6.25bp over Libor. Chinatrust also bought a couple of FRNs to market in the mid 1990's and over the past few years, has issued a spate of private placements off a Merrill Lynch-led MTN programme.
Analysts add that fundamental analysis of the Fubon group is difficult because there are few direct comparables where insurance, securities and commercial banking contribute in equal measures to the overall revenue mix. There are none in Asia and on a global scale, analysts says that the ING group and Citigroup provide the best direct comparables.
Indeed, Daniel and Richard Tsai who between them run Fubon have made frequent comparisons with Citigroup, which they hope to emulate. In an interview with FinanceAsia, for example, vice chairman Daniel commented that, "The two groups share the same philosophy of striving to create an integrated financial services group. That both of us believe cross-selling underpins the kind of corporate culture we want to build for ourselves."
For investors, it will be a matter of deciding how successful the implementation of this strategy is likely to be and how long it might take in a country like Taiwan. The financial sector remains highly fragmented and consolidation has been slow, although on the positive side, high GDP per capita and little brand loyalty means that there is huge potential for the first group to get its strategy right.
As one analyst comments, "It is going to be a bit of a leap in the dark for some investors. Most will find that if they do a sum of the parts valuation, the stock is pretty expensive at the moment with a price to book value of about 1.8 times.
"But," he adds, "This assumes there will be no synergies or cost savings from the integration and the key question really, is just how great is the potential upside from all this stuff?"
Over the short to medium term, analysts say that the key driver of the stock price will be how the group can generate ROE (currently 9.7%) and re-deploy its excess capital. Analysts calculate that there is NT$40 billion ($1.14 billion) of excess capital within the group and Fubon has applied to make a one-time capital transfer of NT$10 billion from Fubon Insurance and NT$7 billion from Fubon Securities up to the parent.
In future, 70% of earnings generated by Fubon Insurance and 45% of earnings generated by Fubon Securities will also be dividened up to the parent where the money can be deployed more efficiently across the whole group. Currently, the excess cash is said to be sitting in low yielding deposits and Fubon has a choice of either letting it continue that way, give some back to shareholders, or make new acquisitions.
Fubon has indicated that it is keen to buy UWCCB (United World Chinese Commercial Bank) and has promised it will only undertake acquisitions if they are earnings accretive. Yet since the Cathay group is also keen to buy the bank, there is a clear risk of a bidding war developing. No one commercial bank in Taiwan holds more than a 10% market share and if it is successful, analysts conclude that Fubon should be able to boost its market share above the 5% mark.
The Fubon group was first established in 1961, when what was then called Cathay Insurance became the Republic's first non-government property insurer. Fubon Insurance is now the country's largest general insurer with a 20% market share, while Fubon Securities is the country's second largest brokerage after Yuanta Securities. Fubon Securities Investment Trust is also the country's second largest asset management company and Fubon Life, the seventh largest in its sector.
