Joint leads Goldman Sachs and Lehman Brothers are in the final stages of preparing Asia's first equity deal since Easter, with the market expecting an exchangeable sometime next week by Mega Financial subsidiary International Commercial Bank of China (ICBC). The deal, which will be exchangeable into Cathay Financial Holdings, has been awaiting final regulatory approval and the announcement of Cathay's first quarter results, due today (Friday).
In contrast to vast swathes of the Asian equity pipeline, the ICBC deal is said to be fairly Sars immune. Partly this is because unlike most straight equity offerings there is no need for a roadshow. But underlying this, convertible bankers also say there is huge demand for equity-linked paper both within and outside of Taiwan.
As one says, "As long as an issuer is prepared to stomach current stock price levels, market conditions could hardly be better as investors are desperate for paper and interest rates are not going to get any lower. Sooner rather than later we're going to see a lot more issuance from Europe, which will compete for investors' attention and satisfy demand. And there are already signs that European issuers are starting to think about issuing on the realization that stock prices are not going to get back to the giddy heights of 2000 any time soon."
Inside Taiwan, excess liquidity within the banking sector is said to have two beneficial side effects for dollar-denominated convertibles. Firstly credit demand is very strong because international deals typically offer higher yields than domestic ones. And secondly because the domestic market has recently been capturing a lot more of the medium sized deals, which would have once come to the international market, those that do still venture abroad benefit from a clearer pipeline.
A number of ECM bankers further believe that ICBC will be able to push for the kind of aggressive pricing levels that Fubon Financial was able to set last April before string of similar deals saturated the market. In its favour, ICBC will have the highest rating of any of the outstanding deals, with the group's residual government ownership lending it an A rating from Standard & Poor's in contrast to the triple B levels of all its privately-owned competitors.
Some bankers believe that ICBC may be able to push investors to pay up to seven points for an unhedgeable stock. This would break recent precedent since Taishin's deal was priced two weeks ago with a 95% bond floor and the three deals before that had floors around the 96% level (Sinopac 96.5%, Chinatrust 96.2% and CBIB 96.4%). The two exceptions are Fubon, which had a 93.5% floor and Cathay Financial, which pushed pricing beyond its limits at 91.7%.
However, most say that seven would be far too aggressive in the current market and believe that six is more of a feasible target if conditions remain as strong as they are.
Taishin showed quite clearly that demand remains strong and while some say the deal erred on the cheap side, others believe it has set an extremely good tone for the market and from the issuer's perspective, managed to achieve balanced distribution.
"That deal was a blowout and could have been entirely sold to outright accounts," says one banker. "But you can't let the credit book completely drive a deal. But if Taishin is anything to go by, ICBC will accumulate a dotcome sized order book on the credit side."
Raising $180 million, Baa3-rated Taishin priced a five-year deal with a zero coupon, 24% premium and redemption at 112.69%. There is also a three year put at 107.42% to yield 2.4%. It is currently trading at 103.5%.
ICBC has said that it wants to complete an exchangeable to dispose of a 2% holding in Cathay Financial - the final remnant of its investment in United World Chinese Commercial Bank (UWCCB), which Cathay acquired last autumn.
Many analysts expect Cathay to post strong results. As Deutsche Bank said in a recent research report, "We think Cathay is capable of delivering better-than-expected 1Q03 results."
It added, "operating fundamentals have improved across major divisions in life insurance and newly acquired UWCCB."
The one major concern is how Sars will affect its share price over the coming weeks. The TWSE fell 4.2% yesterday (Thursday), its largest one-day drop in eight months and bank stocks were also hard hit. Cathay closed at NT$40.5, but is still up 9.76% on the year.
