Day 1 FinanceAsia Achievement Awards - debt
Singapore Telecommunications, $2.29 billion
Goldman Sachs, Salomon Smith Barney
Long after 2001 fades from view, there is likely to be one bond issue that remains firmly lodged in the market's mind. SingTel's runaway success in mid-November stands out as one of the year's memorable transactions and for global investors the deal's size provided the kind of liquidity, which has often been sadly lacking in Asia's corporate credit markets.
Now ranking second to the Republic of Korea's $4 billion deal as the largest on record from the region, the three tranche deal drew the kind of unstoppable momentum that left the leads with a difficult balancing act. Having put out indicative pricing in a much weaker credit environment, the company and leads had to judge how far pricing could be ratcheted in without dropping investors as sentiment turned in their favour. Few would doubt that the company benefited enormously from the fact that global credit spreads re-bounded strongly as roadshows hit their full stride. The retreat of the Taliban from Kabul, positive retail sales data from the US and sharper than expected interest rate cuts from the US Federal Reserve, European Central Bank and Bank of England, conspired to bring back global investors to Asia in their droves for the first time since the financial crisis. Backed by $17.2 billion in demand and a final order book of 656 investors, SingTel consequently priced at the tightest end of a revised indicative range, raising $1.35 billion in 10-year dollars, $500 million in 30-year dollars and Eu500 million in five-year euros.
Alongside the more positive market tone, SingTel's management were also given accolades for enabling the deal's pricing to be tightened in by about 30bp on each of the three tranches.
As Steve Roberts, Salomon Smith Barney s long-standing head of Asian fixed income said at the time, "SingTel management showed a level of understanding that I have rarely seen before. This was their first major international roadshow, yet they'd clearly done an awful lot of homework about the capital markets. I can't tell you how many investors told us that this was the best roadshow presentation they d seen all year. As a result, we had a strike rate of almost 100%."
And despite the fact that some thought the pricing was a little too wide, a number of fixed income research heads believed that the leads had got it about right. Most viewpoints started from a belief that SingTel has reached its rating peak (AA-/A1) and will remain stable at best over the coming years as the company consolidates its numerous acquisitions of the past year.
But for many, SingTel ultimately stands out because it is a high profile symbol of greater international involvement in Asia's credit markets. As one research head concluded, "Demand for this deal has exceeded everyone's expectations. Until now, the main driver of Asian deals has been Asian demand. The next step is to get the European and US accounts more fully involved again. Now that Korea has been upgraded, we believe that there may be a greater consensus among international investors that Asian risk has finally bottomed out."
Linklaters Allen & Gledhill acted as adviser to the issuer, and Shearman & Sterling Stamford acted as adviser to the joint global coordinators.
Special mention:
OCBC Bank's $2.14 billion subordinated debt deal via UBS Warburg. (See Best bank capital write-up below).
Hongkong Land's $600 million deal via Goldman Sachs, HSBC and JPMorgan. This 10-year deal, which marked a debut offering by the group, also represented one of the most perfectly executed deals of the year. Few believed that the A-/A3-rated group would be able to price close to Hutchison Whampoa, yet it managed to come 4bp through and did so backed by an order book of $2.5 billion. Hongkong Land was a deal which underscored the potency of the Asian bid and if any doubted the veracity of aggressive pricing, it has continued to trade well in the secondary market.
Best Non-Investment Grade Bond Deal
Kia Motors, $200 million
Credit Suisse First Boston
The deal represented the first public non-investment grade bond deal by a Korean corporate and as such set a precedent for the whole sector. Backed by a combination of positive credit momentum, lack of direct corporate comparables and strong demand for Korean paper, particularly from onshore investors, the lead was able to price the deal closer to BBB levels rather than the BB-/Ba3 level that the company's rating implied.
Launched in early July, the five-year deal was priced with a coupon to yield 9.375% or 470bp over Treasuries and against virtually any benchmark, it scored an impressive result. The US double B high yield index, for example, was trading at the 528p mark at the time, while a comparable 2007 bond puttable by parent company Hyundai Motor (launched when it was still investment grade rated) was trading at a 410bp level on a one notch high rating and two year shorter maturity.
Pricing came about 200bp behind BBB-/Baa3-rated Kumgang Korea Chemical, which sits at the low end of the investment grade spectrum and 100bp through the levels of the Korean banks. As one observer put it at the time, "A lot of high yield accounts expressed initial interest, but found final pricing too expensive. They didn't want to take anything below 10% and especially not when the Korean sub debt sector is yielding around 10.3%."
Like so many deals this year, getting pricing to work was a function of maximising the Asian bid. Consequently 75% of paper was placed in the region, with US investors accounting for 17% and European investors the remaining 8%.
Special mention:
Bank Mandiri's $125 million FRN via HSBC. The bank became the first sovereign related credit to tap the dollar markets since the Asian crisis in early December. Flying in the face of a number of doubters, the bank also managed to complete its deal without a single hitch in the face of an extended roadshow period, a war against Muslim terrorists and government-to-government debt re-scheduling at the sovereign level.
Best Domestic Currency Bond Deal
UOB subordinated debt, S$1.3 billion
JPMorgan, UOB Asia, Merrill Lynch
In Asia's domestic bond markets, where small bought deals still predominate, UOB's sub debt deal of late August stands head and shoulders above any competition it might have had to win the award. Few would deny that the deal also ranks as one of more surprising success stories of the year. Borne out of a need to replenish capital used to fund UOB's bid for OUB, many assumed that the leads would have an extremely tough job on their hands coming to the market third behind DBS and OCBC and all the paper the two banks had raised ahead of it.
What UOB managed to achieve, however, after executing a clever strategy which saw it grasp control of the market, was the largest bond deal in Singaporean history, the tightest pricing for its sector, the longest maturity by any Asian bank and most importantly of all, a positioning of the bank's credit as Asia's finest.
Getting the structure right was the first hurdle and a 15-year upper tier 2 transaction with a step-up in year 10 was deemed the most appropriate as it is more efficient from a capital perspective than either of the 10-year bullet deals or 10 non-call five issues that had been launched by Asian banks to date. Since capital begins to amortise for regulatory purposes during the last five years of an issue's life, the structure designed by JPMorgan allowed UOB to take advantage of a full 10 years capital treatment at marginal additional cost.
Having convinced UOB that this was the right structure, the leads then needed to persuade investors that it should not have to pay up for it. The first step was to announce an issue size smaller than was really intended, with the aim of raising the amount after generating enough momentum. The second was to canvass investors without price guidance and syndicate the deal through a book built process. To ensure that Singapore's insurance funds did not predominate, the three banks also made every effort to cast the net as wide as possible.
"A borrower has to make sure the psychology is right when it approaches the market," JPMorgan FIG banker Mark Follett commented at the time. "It's important to create a level of uncertainty in investors' minds, so that even the largest funds might wonder whether they will get the allocation they're looking for."
And the results spook for themselves. Breakdown details for the deal showed that there were a total of 72 investors, of which the insurance funds were still the largest component, but with a take of 45% against the 74% secured by UOB s predecessor OCBC.
"I think it's fair to say that the deal exceeded our wildest expectations," was the conclusion of Philip Lee, JPMorgan's head of Southeast Asia investment banking. "Although we'd always believed that people had misjudged the underlying liquidity of the Singapore bond market, we would have still been happy to raise S$1 billion."
The lawyers which worked on this deal were Milbank Tweed, Allen & Overy and Freshfields.
Special mention:
Primus Leasing Thailand's Bt3.4 billion deal via Citicorp. One of the few foreign entities to issue local currency bonds, through a domestic subsidiary, Ford Motor set a number of first with its deal of June. The first ever triple-A rated deal by Fitch (Thailand), the transaction was also launched off the first ever domestic MTN programme. As such it enabled the group to return to the market again in November with a deal that was launched and settled eight days later. Citicorp also bought an innovative twist to the market by using a market rate (THBFIX) to price the deal rather than the more standard and posted rate.
Republic of the Philippine's $220.4 million synthetic Peso/dollar swap issue via HSBC. See write-up for most innovative debt deal below.
Best Bank Capital Deal
OCBC Bank subordinated debt, $2.14 billion
UBS Warburg
In early July, the Singaporean bank scored a hat trick in the subordinated debt markets launching Asia's largest bank capital deal to date and the third largest bond deal on record from Asia. Proceeds were being used to fund the bank's acquisition of Keppel Capital and the bank won numerous plaudits for executing a triple currency deal under an extremely aggressive timeframe, with ratings, roadshows and pricing of the dollar tranche all completed within 17 days of the announcement of the acquisition.
Booking proceeds ahead of possible new deals for either DBS or UOB left OCBC in the enviable position of having financed itself ahead of a glut of Singaporean bank transactions and cushioned its capital ratios against the impact of the S$4.8 billion ($2.7 billion) acquisition. "We had until August 3 to get the funds in place and we also knew that PCCW-HKT was coming with its jumbo bond deal," Paddy O'Brien co-head of Asian debt capital markets commented at the time. "We wanted to get in first and OCBC pushed us hard with a very tight timeframe."
In the event that the acquisition fell through, OCBC also included a novel make-whole provision giving OCBC an option to call the bonds during a window between September 30 and December 10.
The structure of the deal was very much the work of OCBC's CFO Chris Matten, widely considered one of the world's foremost bank capital experts. Shortly after the deal was completed, he commented that, "Our preference was for a multi-tranche structure. Because we were a first time issuer, it was important to remain flexible in order to judge where the deepest demand lay. When we saw the level of demand in our home market, we maximized the amount we could raise in Singapore dollars, then raised as much as we could in US dollars without sacrificing spread and topped the deal off in euros. We ended up with a blended cost roughly where the dollar tranche priced and then swapped back into floating Singapore dollars."
The domestic deal's oversubscription hinted that there was more depth to the Singapore dollar bond market than many had previously imagined and laid the groundwork for UOB Bank to follow a month later with an even larger deal. UBS Warburg also won plaudits for conducting the transaction as a book-building exercise rather than as a more standard hard-underwritten deal, which in the highly competitive arena of the Singapore bond market, normally means 40bp to 50bp too tight.
Where the dollar tranche was concerned, the bank secured its large issue size by throwing the net as wide as possible. Distribution, however, followed recent precedent and was heavily skewed towards Asia which ate up 51% of the paper.
Special mention:
DBS Bank's $782 million tier 1 perpetual transaction via Goldman Sachs and Morgan Stanley. Introducing hybrid securities into DBS's capital mix not only made sense from a tax perspective, but also enabled the bank to buffer its capital ratios ahead of the announcement of its take-over bid for Hong Kong's Dao Heng Bank. The first non-cumulative tier 1 perpetual issue by an Asian bank, the perpetual non-call 10 offering proved to be a huge success with Asia's private client network, which represented about $1.5 billion of a $2.8 billion order book. The deal also proved equally popular in Singapore where an S$100 million tranche of paper was raised simultaneous to a $725 million tranche in the international markets.
UOB's $1.3 billion subordinated debt issue via JPMorgan. See best domestic currency bond write-up above.
Most Innovative Debt Deal
Republic of the Philippines, $220.4 million
HSBC
This synthetic note offering marked the first derivative transaction that the Republic of the Philippines had ever entered into and provided a novel means for the government to secure substantial cost savings over issuance in the straight dollar market. It also showcased HSBC's knowledge of the Peso bond market, where the bank has been one of the most active in trying to deliver depth and liquidity to one of Asia's most underdeveloped domestic bond markets.
In terms of pricing benchmarks, the $116.81 million three-year portion of the notes was completed at 170bp over Libor versus an outstanding trading spread of 325bp over Libor for the Bangko Sentral ng Pilipinas's (BSP) 2004 bond. The $103.59 million five-year portion was completed at 190bp over, compared to a 450bp trading level for the Republic's 2006 bond. Respectively, these equate to a cost saving of 155bp on the three-year and 295bp on the five-year.
HSBC completed a plain vanilla peso/dollar swap at these levels after auctioning Ps11.81 billion of three-year and five-year fixed rate notes domestically. Conducted as a Dutch auction, investors bid pricing 26.4bp and 62.8bp through existing domestic sovereign bonds.
The ability to price below the sovereign curve was largely a matter of tax and the fact that the government caps the number of investors in any individual note transaction to 19.When the Republic normally issues bonds in the domestic market, investors are paid net of tax, meaning that they receive the coupon minus tax. The new note issue, again a first for the sovereign, was paid gross of tax and under domestic law, investors that have a negative tax position, do not have to pay it. Many local banks that had carried forward negative tax positions because of higher provisioning requirements would, therefore, have lapped the paper up.
Best Syndicated Loan and Best Private Equity Deal
Haitai Food Products, Won314 billion (loan)
Joint coordinating arrangers: JPMorgan, Cho Hung Bank
Private equity: CVC, UBS Capital, JPMorgan Partners
This will be remembered as one of the landmark LBOs not only to hit Korea, but Asia as a whole, and could pave the way for a spate of similar LBOs from the Republic. Around 2.5 times oversubscribed, there was a lot that was sweet about this transaction - and not just because it involved a confectionery firm.
Indeed, the W79 billion tranche represented the longest tenor for an Asian LBO, stretching out to seven years. It also saw CVC, UBS Capital and JPMorgan Partners set up a new company, Haitai Food Products to buy the confectionery assets of Haitai Confectionery - and create a market leading new company, from within the distressed Haitai Group.
As all agree, this is just the sort of financial engineering Asia has been screaming out for since the crisis.
With powerful private equity sponsors behind the deal, JPMorgan and Cho Hung were brought in to finance the debt component. The loan was structured in three tranches, and participants could choose to participate in Korean won or US dollars - a move designed to attract maximum interest from Korean as well as foreign institutions.
The first tranche (five years) was for W160 billion and lenders could be paid 250bp over three year corporate bonds or 300bp over Libor. The second W79 billion tranche (seven years) paid 350bp over three year corporate bonds and 375bp over Libor. Finally, the third tranche was a revolving facility for W75 billion priced at 300bp over three year corporate bonds.
The arrangers approached 13 banks and quickly received commitments for W725 billion. Insurers such as Metropolitan Life and Samsung Fire & Marine bought into the seven-year tranche. All concerned were greatly encouraged by the due diligence and transparent documentation that the private equity investors had put in place.
The deal's history begins in March when CVC, UBS Capital and JPMorgan Partners each bought 33% of the equity in a new company, and signed the purchase agreement to inject Haitai Confectionery's assets into it.
The deal took advantage of new Korean bankruptcy legislation, since the seller, Haitai had been declared insolvent in 1997. By August, the private equity firms had received court approval for their acquisition. The loan was then successfully closed in September.
Under the stewardship of it new owners, certainty and growth looks set to return to the chocolate firm and plans are underway to improve its profitability via new products and branding.
It is a deal that truly marks an evolution in the LBO markets in Asia and brings them one step closer to global best practice.
The lawyers that worked on the deal were Milbank Tweed and Lee & Ko.
Special mention:
LG Philips Displays $2 billion loan via ABN AMRO, Citibank and JPMorgan was 77% oversubscribed with total commitments of $3.5 billion. The deal was structured as a standalone corporate credit between Holland's Philips and LG of Korea, which formed a joint venture that has made LG Philips the top cathode ray tube manufacturer in the world. The debt financing was completed in 10 weeks, and for the first time ever saw IBM Credit participate in a bank deal. It marks a further milestone in the restructuring of Korea Inc.
Best Project Finance Deal
Ninoy Aquino International Airport Terminal 3, $440 million
DKW, ADB, IFC, KfW
The financing for the new international passenger terminal at Manila's Ninoy Aquino International airport was a groundbreaking transaction in a number of ways. It is the first time that an Asian international passenger terminal has been successfully project financed. And for that financing to come to the Philippines, which has been beset by credit and political risks all year, was something of a coup.
The arrangers were appointed in February this year, after construction of the site had begun. This made it easier for them to arrange the deal as the construction risks were reduced. But it also made it incumbent on them to speedily close the deal so that the economics of the project could be maximized. This was achieved when the final financing agreements were signed in July.
The lead arrangers obviously believed in the project. They underwrote the combined $440 million, six-tranche debt package before going out to general syndication. This syndication attracted a further 12 participating banks.
The deal was structured with a judicious mix of political risk guarantees from the multilateral lenders such as the ADB and IFC. There was also a commercial political risk guarantee provided by AIG, which gave added support to the lenders. Further support came from the presence of a strong sponsor group under the lead of Fraport the operator of Frankfurt's airport and Nissho Iwai, the Japanese trading house. The sponsors provided $188.5 million in equity to the project or nearly 18% of the total project financing of $628.5 million.
The lenders worked hard with the lawyers and sponsors to overcome some inter-creditor issues, which arose due to differences in the internal financing policies of the lenders and the multilaterals. This flexibility in overcoming these differences was crucial to the successful financial close. Indeed the presence of the ADB and IFC the financing arm of the World Bank was vital to getting the necessary political risks covered and by getting them to change their policies so that the deal could close was a victory not just for this project but for all future Asian projects which will be looking to this deal as a benchmark.
Finally the project financing achieved a tenor of 15 years on two of the tranches of the debt package. This is the longest tenor of any non-ECA backed project financing to have come out of the region since the financial crisis. The law firms which worked on the deal were Clifford Chance, Shearman & Sterling, Freshfields and Sycip Salazar Hernandez & Gatmaitan.
Best Securitization Deal
1st Silicon (Labuan) Inc, $250 million
Nomura
As expected at the start of 2001, the ex-Japan Asia cross-border securitization market has been dominated by Korean issuance, with a range of borrowers including a government agency, large corporations and small and medium-sized entities all tapping the market. Most experts would agree that the Korean market took a great leap forward this year.
Not many would have anticipated Malaysia being a source of much securitization activity and they have been proved right. However, one international deal was completed and this deal wins the award.
The $250 million deal done by Nomura in June for 1st Silicon, Malaysia's first wafer foundry located in the state of Sarawak, introduced an entirely new type of structure to the Asian market.
Whole business securitization may not conform to most people's idea of what constitutes securitization. There is, for example, no true sale of assets from a company to an off-balance sheet special purpose vehicle.
Essentially, whole business securitization ¶ or operating company securitization, as it is also known ¶ enables a business to finance itself from start to finish by securitizing any cash flows that are generated in future.
It is almost identical to a secured loan because in such deals borrowings are usually repaid by cashflows. The difference is that investors in a whole business securitization have greater legal rights, such that they can effectively assume control of the originator's business in the event of a default.
In common law jurisdictions such as Hong Kong, Singapore or Malaysia, the same technology could be applied to finance different start-up ventures that would find it difficult to leverage up because they do not have a track history.
When Nomura, which has developed a niche with this product - having previously done similar deals in Europe - won the 1st Silicon mandate, the project was still in the construction phase: no wafers had been produced or sold, so the transaction was critical in funding the construction of and ensuring production from the 1st Silicon foundry.
The deal has a maturity of seven years with a put and call option after the fifth year. It was rated Baa3/BBB by Moody's and S&P, largely because of the guarantee provided by the Sarawak Economic Development Corporation, but was one of the only deals this year without a monoline wrap. Pricing was at 275bp over Libor.
In a year when most international deals from Asia have been structured with a monoline wrap, the 1st Silicon transaction was fully placed without this to around 25 accounts. Global appetite for the issue was also impressive, with 26% of the notes placed in Europe and 12% in the US.
One final point was that the deal was sold in adverse conditions: global sentiment in the wafer fabrication business was at an all-time low. Closing the deal at such a time testifies that whole-business securitization is a secure investment for investors.
Special mention:
Hanareum International Funding Ltd, $278 million
Credit Suisse First Boston, Daewoo Securities, Hyundai Securities, SG
The first international securitization from the Korea Deposit Insurance Corp., one of the government agencies responsible for restructuring the financial sector, was the most complex deal ever done by an Asian issuer. The deal was backed by lease and loan receivables acquired by the KDIC from 14 failed merchant banks, which required a number of innovative structural and legal solutions. Aided by a wrap from Ambac Assurance - which enabled the deal to get triple-A ratings from Moody's and S&P - the transaction priced at 30 basis points over three month Libor and was fully placed at launch. That itself was an achievement as the deal closed just days after the September11 attacks.