Asian deals that define the decades

By Matthew Thomas, Morgan Davis and Jonathan Breen

In the middle of the 1990s, Hong Kong’s stock market was a minnow. At one point its capitalization was less than that of General Motors, putting it firmly on the periphery of global finance. One deal changed that – and had repercussions for the whole region.

China Telecom (Hong Kong), now called China Mobile, landed a $4.23 billion dual Hong Kong-New York listing. With the possible exception of Alibaba Group Holding’s US float in 2014, it was arguably the most important transaction for Asia’s equity capital markets in the last 30 years.

The deal was ground-breaking. It was the first public flotation of a Chinese state-owned enterprise, starting the flow of SOE listings that turned the Hong Kong Stock Exchange into a market of multi-billion dollar deals. It came as the Asian financial crisis erupted, a moment when the more open markets of southeast Asia and the Asian tigers were collapsing. The timing of its listing, just days before the Asian financial crisis took hold of the region, did not make for an easy debut.

Goldman Sachs and CICC, the firms working the deal, had plenty to do getting the company IPO-ready: it didn’t resemble any Western definition of a company. It was less a SOE and more a small state in itself.

But after a year or so of work, the duo got China Telecom into shape, looking something like an entity that global investors could recognise. It was a crucial learning experience for several bankers who later rose to prominence, including Fred Hu, then working at Goldman Sachs and later the founder of Primavera Capital.

When it hit the market, the IPO immediately thrust Hong Kong into the limelight. The deal marked the beginning of the city’s evolution into Asia Pacific’s leading financial hub.

One banker who worked on the listing also points out that China Mobile happened to be at the very start of the information technology revolution. In 2019 it may appear to be a sleepy dividend stock, but in the late 1990s China Mobile was a must-own growth story.

In its wake, a seemingly endless number of mainland Chinese firms began looking south to list, while companies from other corners of the region also turned to Hong Kong in search of equity fundraising. But most important of all, global institutional investors started setting up in the city as a result of China Telecom.

Asiamoney’s pick for the debt deal of the 1990s wasn’t the most successful nor the most beautifully executed bond sale, but it was by far the most important.

Indonesia’s Asia Pulp & Paper (APP) was the golden child of the 1990s, and its bond deals were much-loved by investors in a very thin market. But following the borrower’s failure to pay back its debt in the early 2000s, APP has become synonymous with default, the example that comes rapidly to mind when bankers try to describe emerging market flops.

Back in 1990s, when APP approached the market, it was already a prominent Asian issuer. Owned by the Widjaja family, one of the richest in Indonesia, and listed in New York, APP was a golden goose for many bankers at the time; companies in the APP group were repeat visitors to the capital markets and handed over millions of dollars in fees to banks in the region.

“Before the Asian financial crisis, it was the preeminent issuer,” says one senior debt capital markets banker in the region. “Back in the wild days of Asian bonds, APP defined the market.”

During the 1990s, it was Indonesia, not China that led the market for offshore high-yield bonds. Emerging-market and Asian investors all had a piece of Indonesia in their portfolios, and APP was a big part of that slice.

But the company expanded too fast. APP International Finance sold nearly $850 million worth of public bonds in dollars and yen in 1995 and 1996, according to Dealogic. In 1994, the company publicly sold a $200 million 13.25% 2001 bond through Pabrik Kertas Tjiwi Kimia. In 1997, the same subsidiary sold a $600 million 10% 2004 note. Likewise, subsidiary Indah Kiat Pulp & Paper Corp sold a $175 million 8.875% bond in 1993, and $1 billion worth of notes in June 1994, and raised more than $352 million in 1996 in a yen-denominated transaction. Other parts of the APP business sold dollar deals as well.

But in 2001, in the wake of the Asian financial crisis, APP defaulted on almost $14 billion worth of bonds and loans, dragging down countless investors with it.

“It defined many bankers’ lives,” says the senior DCM banker. “Once it went under – wow! It was the beginning of many surprises.”

Japan’s megabanks are aptly named. Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group each have over ¥200 trillion ($1.8 trillion) of assets. They represent about half of the country’s banking system, according to Moody’s. But they are lumbering firms, struggling to find new paths to growth. It was not always so.

These institutions were grown through a series of mergers in the 1990s and 2000s. Mizuho was created in 2002 through the merger of Dai-Ichi Kangyo Bank, Fuji Bank and the Industrial Bank of Japan. Sumitomo Bank, already large, bought Sakura Bank in 2001. But it was the merger of Bank of Tokyo and Mitsubishi Bank in 1996 that most drastically altered the landscape in Japan’s financial system.

These two firms were already big. Mitsubishi Bank was one of the 10 largest in the world, according to press reports at the time. Bank of Tokyo, while smaller, had a more international business that promised to offer its partner access to a whole new Rolodex of clients. When the deal went through in April 1996, it created a firm that was – at the time – the biggest in the world.

But the merger spree did not stop there. In 2006, the firm merged with UFJ Bank, which was itself the result of a merger between Sanwa Bank, Tokai Bank and Toyo Trust and Banking in 2002, following the bursting of Japan’s asset price bubble. The institution is now known as Mitsubishi UFJ Financial Group at the parent level, but the banking division was renamed MUFG Bank in 2018.

Mitsubishi UFJ Financial Group now has more than ¥300 trillion of assets, making it comfortably larger than either Mizuho or Sumitomo Mitsui.

These mergers did not create Japan’s megabanks out of nowhere. Sumitomo Bank was once the largest in the world; the others were all already big. But the mergers did create a domestic landscape where three banks stood above all others in terms of size, reach and importance to the domestic financial system.

That created problems. Japanese banks’ huge portfolio of government bond holdings means they are required to acquiesce, at least implicitly, to the Bank of Japan’s constant attempts to resuscitate the economy by profit-killing easing measures, including the decision to offer negative interest rates in 2016.

The merger spree also removed a lot of the sources of potential growth for Japanese banks. What they could otherwise have achieved organically, through typical means of competition, they instead gained through mega-mergers.

Their size has only exacerbated the problem of finding profitable sources of business in the domestic economy. It has also forced them to face a paradox when considering the offshore market: Japanese banks need to move overseas – and they can afford to – but they struggle to do it meaningfully. When you count your assets in the trillions of dollars, there are few acquisitions that will make a noticeable impact on the bottom line.

The merger of Bank of Tokyo and Mitsubishi Bank began the shift towards a strange system in which three banks sometimes appear helpless in their domination. There are few deals that have had such a lasting impact, not just on the institutions involved, but on the entire system of which they are a part.

Maxis Communications’ Malaysian IPO came at the end of a decade that, for Asia’s equity capital markets, had been overshadowed by the Chinese listing craze – Hong Kong holding the limelight for hosting numerous multi-billion dollar privatizations of state-owned companies.

Maxis had a tough act to follow.

It set out to show that southeast Asia could produce IPOs to match those of the north, if not as frequently.

The company was previously government-owned and had traded on the local stock exchange, Bursa Malaysia, since 2002. But it was delisted and taken private by reclusive billionaire Ananda Krishnan in 2007.

Krishnan came back in 2009 with the intention of relisting a trimmed down version of Maxis, floating just its domestic telecommunications business. The company’s high-growth Indonesian and Indian assets had been stripped out of the deal.

In a curious political twist it was Najib Razak, then prime minister of Malaysia, who announced the coming IPO, not Krishnan. CIMB, Credit Suisse and Goldman Sachs were brought in to handle the deal, which had two distinct sides to it.

Maxis was well-known locally; consequently Malaysian investors, from institutions to individuals, came out in force to support the IPO. It likely helped that local retail investors were given a 5% discount to the bottom of the marketed price range.

Internationally, however, Maxis was not cheap compared with other southeast Asian telecom companies. But it was seen as a strong dividend stock so, despite the price, foreign investors piled in and ended up taking up 60% of the institutional tranche of the float.

With final pricing in November 2009, the IPO came in at a whopping $3.2 billion. It was enormous for Malaysia, equal to about eight days’ trading on the local bourse, and it immediately became one of the country’s top five stocks.

Maxis capped a decade of little excitement for Malaysia’s IPO market, having not seen anything over $250 million in two years and most deals below $100 million.

And for the bankers that worked on the relisting, it also sent a signal from the wider region, showing there was still strong support for IPOs in Asia’s emerging markets.

The IPO remains the largest from southeast Asia to date – by more than $1 billion over the second-largest listing, according to Dealogic data.

When Hopson Development Holdings sold its first dollar bond in November 2005, a $300 million 8.125% seven-year note, no one realized how big the Chinese high-yield property sector would become in Asia’s offshore debt market in the years that followed.

Today, China’s high-yield-rated property companies are some of the biggest contributors to the offshore bond market. Between January and the end of August this year, $42.5 billion worth of such bonds were sold.

While the bankers who led the Hopson deal in 2005 could not have predicted the volume of property bonds to come in the next decade, they did realize that the Hopson transaction was important.

“We knew it was opening a sector, but I don’t think we really thought seriously regarding the scale it would lead to,” says Alister Moss, head of DCM syndicate for Asia ex-Japan at Nomura, who worked on the trade while at Credit Suisse.

Because the deal was a debut not just for the borrower but for the whole sector, it wasn’t an easy sell.

Jonathan Yip, head of greater China DCM at Nomura, who also worked on the transaction, says: “It was certainly a pioneer in the sense that it opened up the debt capital market route as a means of funding for the sector. There was no precedent to this.”

That left the Credit Suisse team to educate investors not only on the credit, but on the nature of the Chinese real estate market.

“The insatiable appetite for housing in China had to be appropriately portrayed to investors,” says Yip.

While outsiders may not have known Hopson or the Chinese property market, they had heard of the Pearl River Delta and Hopson’s home base in Guangzhou, near bustling Shenzhen.

“The marketing process was intense, US high-yield credit style,” recalls Moss, adding that Hopson wasn’t the most obvious name to kick off property issuance. “This was really before the days of the all-welcoming Asian bid.

“It was all very new – the sector, the name, and in a market that had been choppy,” he says. “We put in a hell of a lot of hard work to get the deal done but the result was very pleasing for all.”

The Hopson trade was quickly replicated, with Shanghai Real Estate, Agile Property Holdings, Greentown China Holdings and Shimao Property Holdings all following with deals in 2006, according to Dealogic.

Unlike many of the real estate notes sold today, these trades weren’t anchored by Chinese investors, and required a great deal of traditional high-yield book-building, says Yip.

The global banking system was in disarray. A credit crunch that began in the US mortgage market had spread like a virus throughout the financial system. Bear Stearns had effectively collapsed, to be absorbed by JPMorgan. Securitization markets were in a free-fall. Lehman Brothers had declared bankruptcy.

This was the reality that confronted Kenichi Watanabe, Nomura’s president and chief executive in September 2008. He was determined to turn the Japanese firm into a global investment bank. But by the middle of 2008, was that even a goal worth fighting for?

Watanabe thought so. While other bank executives focused on sheer survival, he told investors he was facing a “once in a generation opportunity”. Crises may cause some banks to fail, but they also push those that survive to historically low valuations. Watanabe, certain that parts of Lehman could survive with his help, quickly stepped in.

On September 22, 2008, Nomura announced it was buying Lehman’s Asia-Pacific business, adding around 3,000 bankers to its workforce. A few weeks later, it said it was adding the European and Middle East teams to the deal as well. The US business was left out of the deal, instead going to Barclays.

It always looked like an odd fit. Lehman had a culture that would have been tough to marry, even with a lot of US investment banks. Its staff were aggressive, hyper-confident and willing to take risks their competitors often didn’t have the guts for. Nomura, for all of its ambition, was still a Japanese bank, steeped in a cautious, deliberative banking culture that did not welcome risks without serious analysis.

At first, things started well. Nomura, realizing that if it wanted to become a global player it had to pay like one, offered guaranteed bonuses to the Lehman staff who joined in Asia. Most Lehman bankers, realizing they wouldn’t get a better offer elsewhere, quickly took it. Jesse Bhattal, Lehman’s Asia chief executive, was seen as a hero by many Lehman bankers for the part he played in securing them such a deal.

But even in those early days, some Lehman bankers admitted privately they were unlikely to stay on after their bonus guarantees expired. They were sceptical about the new firm. Nomura’s legacy bankers, meanwhile, were said to resent the special treatment their new colleagues were getting. They could have been forgiving for wondering which bank had rescued which.

Kenichi Watanabe could not make the fit between Nomura and Lehman Brothers work

The two cultures never did quite find common ground. Many Lehman bankers did indeed run for the exit once they had been paid the last of their bonuses. Bhattal was among a string of senior bankers who ultimately parted ways with the Japanese firm; he left in 2012.

Earlier this year, Nomura announced that it was taking a ¥81.4 billion ($755 million) write-down, which it blamed on the Lehman and Instinet acquisitions. Much of the Lehman portion of that is likely to have come from Europe, which senior bankers regard as the biggest problem area after the acquisition.

That should come as little surprise: the year after the financial crisis, the European sovereign crisis hit. The boom years never quite returned.

When Asiamoney sat down with Koji Nagai, Nomura’s chief executive since 2012, we asked him if he would go ahead with the acquisition today.

“It’s a difficult question to answer,” he said. “I’m not sure how I’d react to that situation if it happened today.

“What if we bought the US and Asian operations instead? We might have had a completely different experience. This kind of decision-making comes with a certain amount of luck.”

Alibaba Group Holding’s listing is not just the equity deal of the decade by an Asian issuer, it is also one of the most important IPOs for the global equity capital markets in the 21st century.

The Chinese national champion smashed all records with its $25 billion flotation of American Depositary Shares on the New York Stock Exchange in September 2014.

But the company did not flout its heavyweight status and ask for a wild valuation. It was reasonable, offering investors a decent discount to comparable issuers such as Tencent Holdings, for example.

And despite being so big, joint bookrunners Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan and Morgan Stanley had no problem selling Alibaba’s IPO. They were even able to increase guidance mid-way through the roadshow to finally price the shares above the adjusted range after closing books early.

But what also made the deal so important at the time was the whole host of tech companies that were counting on the success of the e-commerce firm’s flotation and aftermarket trading. Failure might have the IPO market to seize up.

Those worries are now just a memory. The stock rose over 30% on its first day of trading and didn’t come crashing down afterwards, which had a knock-on effect of driving up the share prices of numerous tech stocks and whetting investors’ appetites for IPOs from the sector.

Alibaba had people biting their nails before the IPO, while it was deciding where to list. The company had a long tussle with its preferred destination Hong Kong. Jack Ma wanted to break the local rules with a listing structure that would allow him to retain control of Alibaba.

Dual-class share listings – where one type of stock has more voting power than another – were already common in the US. So naturally the company was looking at potential IPOs on the Nasdaq or NYSE.

London was also vying for the listing. According to reports at the time, David Cameron, UK prime minister, met Ma during a trade mission to China to try and sway him towards the LSE.

A year before the company went public, Alibaba was still keen on Hong Kong. Its vice-chairman Joe Tsai lambasted the city’s stock exchange for being so unaccommodating. Ultimately HKEx stuck to its principal of ‘one share, one vote’ and in the process lost the world’s largest IPO.

The experience triggered a public review of dual-class share structures by HKEx, setting in motion a modernization of the exchange, although it took four years to materialise.

HKEx’s outspoken chief executive Charles Li finally managed to get a chapter added to the exchange’s rulebook in April 2018 allowing dual-class share listings. The bourse welcomed its first such listing in the a few months later from Xiaomi Corp. Alas, that deal was a flop.

Paiton Energy’s $2 billion dual-tranche project finance bond was sold in 2017 after years of preparation. Bankers away from the deal marvelled at the transaction at the time, with several noting that it was the one deal of the year that they wished they could have worked on.

The trade was notable for a number of reasons, from its complex structure to its remarkable execution. But most markedly, Paiton, the second-largest domestic independent power producer in Indonesia, re-opened the project finance bond market – a sector in Asia that had long been dormant. The deal was the first benchmark dollar project bond issued by an Asian power company in more than a decade, and the first 144A/Reg S project bond in Asia since 1997.

Granted, Asia has seen just a smattering of other project finance bonds sold since Paiton’s successful transaction, but the potential for the space is important.

“It really set the ball rolling,” says one of the DCM bankers on the deal. “It’s not a one-off for sure.”

The DCM banker reckons that other infrastructure-related companies operating in businesses such as natural gas or pipelines will take a look at Paiton’s deal as an example for fund-raising. The likes of Star Energy Geothermal and Lestari Banten Energi, both from Indonesia, have done just that.

In recent years, market participants have focused on the need for increased infrastructure spending in Asia. The Asia Development Bank says that the region needs to invest $1.7 trillion a year in infrastructure until 2030, and some 60% of the investment needed in that time will have to come from the private sector.

Many companies seeking such funds will need to turn to the capital markets. Bank financing has long been the cheapest option in Asia, but that is changing, and companies need alternative options, says the DCM banker. With Paiton’s transaction as a template, more energy companies will be able to pursue their own project finance bonds.

Bankers working on Chinese outbound M&A were riding high in 2016. The demand from their clients to make acquisitions in Europe or the US had never been greater, with almost $220 billion of acquisitions announced across 512 deals, according to Dealogic data.

They were working on deals for state-owned companies, tech firms, banks, insurers and everyone in between. They were finally getting a lot of business from their Chinese clients, a crop of buyers that had historically been rather cautious.

There were a few reasons for that caution. First, most corporate executives in China knew that their domestic economy offered more growth than almost anywhere else they could invest. Second, they had little experience of external markets, where their domestic connections – known as guanxi – would have meant little. Third, the government’s tight capital controls meant getting foreign exchange approval for large deals was a politically difficult gamble.

By 2016, all of those hurdles seemed to have been cleared. China’s GDP growth the year before was about 6.9%, still impressive in global terms but the second year running that the pace of growth had slowed down.

Moreover, some Chinese corporations had become so large domestically that domestic acquisition candidates were few and far between. The slow and steady deals they had been able to do in the preceding years gave them a new faith in their ability to navigate offshore markets. And as for China’s strict foreign exchange controls, it didn’t make sense to question policy when the government appeared to be willing to let so many deals through.

ChemChina’s takeover of Erik Fyrwald’s Syngenta showcased the good and bad of Chinese outbound M&A

The wall of deals led to a record year for Chinese acquisitions into Europe and the US. There were high-profile failures, such as Anbang’s aborted purchase of Starwood Hotels, reportedly for $14 billion. There were also high-profile successes, including Tencent’s $8.6 billion purchase of Finnish games company Supercell. But none was bigger and more awe-inspiring than ChemChina’s $43 billion acquisition of Swiss seed and chemical company Syngenta, announced in February 2016.

The deal showcased the good and the bad of Chinese outbound M&A. It was a strategic, logical acquisition for a Chinese company with global ambitions.

It was proof that Chinese companies were engaging with the world. It was also – and this is the important bit for bankers who worked on the deal – absolutely massive.

But now the bad: the deal appeared to rely on $30 billion of financing from one bank, continually missed deadlines and raised the ire of European regulators. The deal was announced a few months before Syngenta picked Erik Fyrwald as its new chief executive; he had been in the job almost a year by the time the deal went through.

It foreshadowed the problems bankers face when working on Chinese outbound M&A today: if they can convince Chinese regulators to approve a deal, they still need to fight to get approval from regulators overseas.

Neither of these things is easy nowadays. China’s regulators pushed back against the tide of outbound M&A in late 2016. Foreign regulators, particularly in the US, in turn became more willing to reject Chinese deals or leave them hanging in limbo.

This means ChemChina is likely to retain bragging rights as China’s largest outbound M&A deal for many years to come. It was a deal that defined a particular point in history, a frothy, chaotic time when Chinese M&A bankers were superstars at their firms. It is a point in history that is unlikely to be repeated, but that, for many bankers, is no doubt sorely missed.