Deals of the Year 2018 – Asia-Pacific

Bonds: Corporate 

WINNER: TenCent’s $5bn four-tranche bond 

Joint global coordinators and joint bookrunners: Bank of America Merrill Lynch, Deutsche Bank, HSBC 

Joint bookrunners: ANZ, Bank of China, BNP Paribas, China Merchants Securities (HK), Credit Suisse, Goldman Sachs, JPMorgan, Mizuho, Morgan Stanley, MUFG

When it comes to retail finance in China, traditional lenders have been sidelined by two technology companies: Ant Financial, an affiliate of e-commerce giant Alibaba, and internet conglomerate TenCent. Together they dominate the country’s $5500bn payments industry and are the world’s best examples of tech firms getting an edge over banks. 

In truth, TenCent’s market share has always trailed that of Ant Financial, which launched around a decade earlier. But over the past 12 months, TenCent has closed in on its more-established rival. It recently convinced Wal-Mart to switch to its e-payments services, it has a faster growing customer base, and its landmark bond issuance earlier in 2018 shows it holds just as much sway with debt investors. 

On January 11, TenCent raised $5bn in the international bond markets via a hugely successful four-tranche deal. The multi-part issuance consisted of $1bn of five-year fixed tranche, $500m of five-year floating rate notes, $2.5bn of 10-year fixed notes and $1bn of fixed-rate 20-year notes. The order book reached more than $40bn, which allowed pricing of each tranche to tighten by 25 to 30 basis points from initial price guidance. Alibaba had to pay more for the 10- and 20-year notes it sold in November 2017. 

The deal marked TenCent’s return to international bond markets after a three-year absence, its debut sale of 20-year notes and its largest international bond sale to date. Furthermore, the deal was timed to perfection, launching less than two weeks after the implementation of US tax changes that make it easier for US tech companies to repatriate cash they have hoarded overseas. The reforms mean they should have less need to tap the bond markets, which arguably increased US demand for TenCent’s deal. Indeed, more than half the notes were sold to US investors. 

Bonds: SSA 

WINNER: China’s $2bn sovereign bond 

Lead managers and bookrunners: Agricultural Bank of China (Hong Kong), Bank of China, Bank of Communications (Hong Kong), China Construction Bank (Asia), CICC, Citi, Deutsche Bank, HSBC, ICBC International, Standard Chartered

The Chinese Ministry of Finance has little need to tap the international debt markets. Its $9300bn local bond market is the third biggest in the world and it has more than $3000bn in foreign exchange reserves. Nonetheless, it made the strategic decision to sell $2bn-worth of Eurobonds in October 2017. 

The Reg S senior unsecured deal was split between a $1bn five-year tranche and $1bn 10-year tranche. It was China’s first foreign currency bond since 2004 and was more than 10 times oversubscribed. This allowed pricing to tighten 15 to 25 basis points (bps) from initial price guidance to finish 15bps over the five-year Treasury rate and 25bps over the 10-year Treasury rate, respectively. 

It was an opportunistic move, designed to take advantage of low US interest rates to lessen borrowing costs for Chinese firms – particularly the country’s state-owned enterprises, which in recent years have raised substantial volumes in the international bond markets. In this sense, the deal was a success. It achieved one of the tightest re-offer spreads globally for dollar-denominated five-year and 10-year unrated bonds, and the tightest re-offer spread for an Asian (excluding Japan) sovereign issuer at these tenors. It sets an enviable sovereign curve for Chinese borrowers.

The allocation was geographically diverse. Some 52% of the five-year tranche was taken up by Asian accounts, while 28% and 20% were placed with Europeans and offshore US buyers, respectively. Forty-seven percent of the 10-year notes were placed in Asia, 34% in Europe and the remaining 19% with offshore US buyers. 

In terms of investor type, fund managers accounted for more than half of both tranches, while public sector investors bought 11% of the five-year notes and 16% of the longer tenor.

Bonds: FIG 

WINNER: Postal Savings Bank of China’s $7.25bn additional Tier 1 capital 

Bookrunners: Bank of America Merrill Lynch, CICC, Crédit Agricole CIB, China Merchants Securities (Hong Kong), DBS, Goldman Sachs, HSBC, Haitong International, Huarong Financial, ICBC Asia, JPMorgan, Morgan Stanley, Ping An of China Securities (Hong Kong), UBS

The sale by Postal Savings Bank of China (PSBC) of $7.25bn-worth of additional Tier 1 capital (AT1) in September 2017 was a landmark event for the issuer and the market at large. For PSBC, not only was this its first dollar-denominated AT1 – a type of loss-absorbing capital required under Basel III – it was also the bank’s debut in the international bond markets. Having opened its doors just 11 years ago, this regulatory capital issuance is a leg-up for one of the world’s youngest, large commercial banks, which has significant growth potential.

The deal broke a string of bank capital and bond market records. It was the world’s largest international debut bond, the biggest ever international capital issuance by a Chinese bank, and the biggest Reg S sale to date. The perpetual non-call five-year notes represent Asia’s biggest single tranche international bond and the world’s biggest single-tranche AT1.

The timing was advantageous in that it capitalised on a global AT1 rally which saw spreads tighten to record lows. On the flip side, the bookbuilding coincided with Standard & Poor’s downgrading China’s sovereign rating (for the first time in eight years) from AA- to A+ due to its debt burden. Bookrunners also had to deal with slightly softer market sentiment following a US Federal Open Market Committee meeting. 

Nonetheless, the issuance was nearly two times oversubscribed – impressive given this was a debut and the large deal size. The coupon was set at 4.5%, which represented a tightening of 35 basis points from initial guidance. That made it the lowest coupon and tightest spread for a Chinese AT1. Such an achievement in a debut deal reflected the seamless execution and investor confidence in the bank’s capital profile.

Equities 

WINNER: Avenue Supermarts’ Rs18.7bn IPO 

Sole global coordinator and bookrunning lead manager: Kotak Mahindra Bank 

Bookrunners: Axis Capital, Edelweiss, HDFC Bank, ICICI Securities, Inga Capital, JM Financial, Motilal Oswal, SBI Capital

India is now the world’s fastest growing large economy. Even more encouraging for its financial development is the fact its capital markets are keeping pace. Analysts expect the country’s stock market capitalisation to treble over the next decade to reach $6000bn. Foreign investors looking to bet on Indian growth and development saw the country’s benchmark indices hit record highs in early 2018. 

It stands to reason that 2017 was a blockbuster year for Indian initial public offerings (IPOs). The highlight was Avenue Supermarts’ listing on the Bombay Stock Exchange and National Stock Exchange. The owner of D-Mart, one of the country’s biggest hypermarket chains, raised Rs18.7bn ($288m) from its March 2017 flotation, which was more than 100 times oversubscribed. It attracted the second highest volume of orders in the history of Indian IPOs. Shares were priced at the top of the initial price range and since then have continued to soar, defying the market correction seen in recent months. 

The IPO’s success is testament to the bookrunners and the issuer’s impeccable credentials. The banks leading the deal secured a suite of top-tier local and international anchor investors, some of which were participating in the same deal for the first time. The banks achieved a 99% strike rate from one-on-one meetings conducted on a roadshow throughout Asia, the US and Europe.

The issuer’s financial profile was also a drawcard. It had grown profits over the preceding five years, decided to expand its footprint selectively throughout the country’s south and central region, and focused on a well-defined target customer base. This provides a model for the country’s other retailers, many of which have suffered from growing too fast and offering too many products. Funds raised by Avenue Supermarts have repaid, or pre-paid, borrowings, allowing it to reduce its debt costs. The remainder has been earmarked for the construction of new stores.

Green finance 

WINNER: Neerg Energy’s $475m green bond 

Joint global coordinators and bookrunners: Bank of America Merrill Lynch, Goldman Sachs, HSBC, JPMorgan, UBS 

Co-manager: Kotak Mahindra Bank

Asia’s green bond continues to mature, with landmark deals out of Singapore and China. But in choosing the winner of this category, it was impossible to look past a $475m issuance by a subsidiary of India’s ReNew Power. 

India almost doubled its green issuance volumes in 2017 to reach $4.3bn, yet ReNew Power is one of only a handful of corporates to tap the international market. The renewable energy group did this via a five-year non-call three bond sold by its offshore subsidiary Nerg Energy. 

The deal relied on an innovative structure. Nerg Energy was set up as a Mauritian special purpose vehicle to sell the dollar-denominated notes. The proceeds were then used to subscribe to masala bonds (rupee-denominated notes issued outside of India) issued by ReNew Power’s operating subsidiaries in India. This unprecedented structure allowed the group to access the very large dollar-focused investor base while protecting its subsidiaries from foreign exchange risk. The dollar-denominated bonds are secured by the underlying masala bonds, which means end investors are exposed to the ReNew group’s underlying credit. 

Its novelty did not get in the way of a strong market reception. The February 2017 deal was upsized $25m from an original target of $450m and the coupon set at 6%, down from initial guidance of 6.375%. 

Proceeds from the notes, which were certified by global standard-setter the Climate Bonds Initiative, will be used by ReNew Power’s various subsidiaries in line with the group’s newly established green bonds framework. The deal creates another avenue via which corporates can raise green finance. Given India is one of the world’s most polluted countries, and the fact green investment from foreign investors is critical to meeting the government’s ambitious clean energy targets, the private sector should look to follow ReNew Power’s precedent. 

Infrastructure and project finance 

WINNER: PT Paiton Energy’s $2bn project bond 

Joint global coordinators and bookrunners: Barclays, HSBC 

Joint bookrunners: Citi, DBS, Deutsche Bank

Project sponsors must lament Basel III. The capital accord made long-dated financing prohibitively expensive for many banks, making it harder to source funding for public utilities, energy projects and the full array of infrastructure. The silver lining has been the project bond market, which has flourished as institutional investors become accustomed to the unique risks associated with project finance. 

Not all regions, however, have benefited. Up until 2017, Asia had not seen a publicly sold project bond for two decades. The drought was ended by PT Paiton Energy, one of Indonesia’s biggest independent power producers, in August when it sold $2bn-worth of notes split across a $1.2bn 13-year tranche and a $800m 20-year tranche. 

Both tranches are amortising, meaning the principal is gradually repaid over the life of the bond. This eliminates refinancing risk and means the project company’s debt obligations match its underlying cashflows. The bonds were rated Baa3 by Moody’s and BBB- by Fitch, making it the first investment-grade issuance from Indonesia’s private sector. This was thanks to the amortising feature, the tranches being sized to manage the project’s debt service coverage ratio throughout its life cycle, and a long-term offtake agreement with state-owned electricity firm PLN.  

The deal drew more than $9bn of orders and priced at 4.625% (for the 13-year tranche) and 5.625% (20-year tranche) after tightening substantially. The bonds were accompanied by a $750m dual-currency six-year term loan, which was Indonesia’s longest dated corporate loan since the financial crisis. 

Via this deal, PT Paiton Energy has set an important precedent for other sponsors seeking to diversify their funding base. Not only does it set a benchmark for project bond pricing and documentation, it also confirms that investors are willing to accept amortising structures and project bond risk in Asia.

Leveraged finance 

WINNER: ,Belle International’s HK$28bn senior secured facilities 

Sole initial underwriter and mandated lead arranger: Bank of America Merrill Lynch 

Mandated lead arrangers: ANZ, Bank of China (Hong Kong), China Citic Bank (Shenzhen), China Minsheng Banking Corp (Hong Kong), China Merchants Bank, DBS, ICBC Asia, MUFG

Asia’s leveraged finance market trails far behind that of the US and Europe in size and sophistication. It is fragmented along national borders (much like Europe was 25 years ago) and banks still provide most of the liquidity. As a market in its early stages of institutionalisation, it often lacks the excitement of US and European-leveraged finance.

Yet in 2017 it generated a handful of standout and sizeable deals that show the asset class is developing. The highlight was the financing for the take-private of Belle International, China’s biggest shoe retailer. In April 2017, a consortium led by Chinese private equity firms Hillhouse Capital Group and CDH Investments announced its intention to acquire the company, which was listed on the Hong Kong Stock Exchange for HK$53.1bn ($6.8bn). 

The biggest sponsor-led acquisition of 2017, and Asia-Pacific’s biggest ever sponsor-led take-private, closed in August 2017. Such an ambitious deal would not have been possible without an equally impressive financing package, the lynchpin of which was Bank of America Merrill Lynch (BAML). 

BAML solely underwrote HK$28bn-worth of senior secured credit facilities needed to back the deal. It consisted of a HK$21.5bn five-year amortising term loan and a HK$6.5bn bridge loan. BAML deserves much credit for the deal’s success. The financing was in place when the consortium announced its offer, notwithstanding the fact that Belle’s physical shoe-shops are facing stiff competition from e-commerce. It is Asia-Pacific’s biggest sponsor-led acquisition financing to be solely underwritten, and was followed by a slick syndication, which completed well ahead of the deal’s funding and was oversubscribed. Ten other lenders bought into the deal, including several international banks that were new to the buyer consortium and relatively infrequent participants in leveraged financings. 

Islamic finance 

WINNER: Ihsan’s RM100m sustainable and responsible investment sukuk 

Sole lead arranger: CIMB 

Lead manager: Maybank Investment, RHB Investment

Over the years, Khazanah Nasional has made a name for itself as a leader in Islamic finance. The Malaysian sovereign wealth fund is in the vanguard of innovation when it comes to sukuk, a good example being its sale of the country’s first sustainable and responsible investment (SRI) sukuk back in 2015 via special purpose vehicle Sukuk Ihsan. 

In August 2017, Khazanah built on this via Sukuk Ihsan’s second SRI issuance, the proceeds from which went to Trust Schools Programme (a not-for-profit foundation that improves children’s access to education across the country). While Ihsan’s first sukuk was sold exclusively to institutional investors, this latest deal included a retail tranche. The RM100m ($25.8m) transaction consisted of a RM95m institutional tranche as well as a RM5m exchange-traded tranche. It is the first time retail investors have been able to buy SRI sukuk, and gave Malaysian citizens the opportunity to make a social impact via their investments. 

In another first, individuals could buy into the deal via a crowdfunding platform, and it allowed people to invest as little as RM10. Both tranches of the seven-year notes were oversubscribed. The coupon and principal repayment changes depending on whether key performance indicators (KPI) regarding the Trust Schools Programme – including student outcomes and teachers’ performance – are met. If the KPIs are fulfilled, the coupon is 4.2% and small portion of the principal is repaid in tax vouchers. If the KPIs are not met, the coupon is 4.6% and investors are entitled to full repayment at maturity. 

Though small, this transaction sets a new benchmark for connecting retail money with social impact programmes and giving individuals access to local capital markets.  

Loans 

WINNER: JD.com’s $1bn syndicated loan 

Mandated lead arrangers and bookrunners: Bank of America Merrill Lynch, Bank of China (Hong Kong), Deutsche Bank, Standard Chartered

For many years, Alibaba has dominated China’s massive e-commerce market, which is the world’s biggest. But lately its main competitor, JD.com, has upped the ante. It is nibbling away at Alibaba’s market share, investing in a cloud-based platform and eyeing expansion into Europe. 

With such ambitions, JD decided it was time to turn to the international loan market. In September 2017, it hired banks to arrange its debut syndicated loan facility, with a target of $500m. Observers noted that JD had not posted an annual profit since becoming a public company in 2014, but this did not impede the deal’s success. 

The mandated lead arrangers (MLAs) targeted banks that were active in the telecommunications, media and technology sectors. Plus, an early bird fee was offered with the hope some lenders would commit soon after launch. These tactics worked. The deal received significant interest in its first week of syndication. By the time the deal closed in December, the MLAs received commitments from 18 lenders, including international names with no prior history with JD. 

It was well oversubscribed, which allowed the MLAs to exercise their green-shoe option and double the size of the deal. The $1bn senior credit facilities consisted of a $450m term loan and $550m revolving credit facility. The lenders were right to look past JD’s profitability woes as three months after the deal closed, JD announced it had posted a profit in 2017. The loan was a vote of confidence in JD, and in turn, helped boost competition in the global e-commerce market.

M&A WINNER: Rosneft’s $12.9bn acquisition of Essar Oil 

Financial adviser to EGFL: VTB Capital

August 17, 2017, marked the completion of a historic transaction for Russia, India and two of their biggest resource companies. The $12.9bn takeover of Mumbai-based Essar Oil by a consortium led by Rosneft was Russia’s largest ever foreign investment as well as India’s biggest inbound investment. For Russo-Indian business relations, it was nothing short of a landmark event.

For the parties themselves, the deal made clear business sense. The seller, Essar Group, was heavily indebted and the sales proceeds allowed it to substantially delever its subsidiaries balance sheets. The sale of Essar Oil led to a $11bn reduction in group-wide debt, a win for the company as well as its lenders. 

For Rosneft and its fellow consortium members, European commodities trader Trafigura and Russian fund UCP, the acquisition gave them access to India’s energy market (the fastest growing in the world) and a platform from which they can expand throughout the region. It saw Rosneft, one of the world’s biggest oil companies, take ownership of its first refinery in Asia. 

Every stage of the transaction had its challenges. To secure the deal, it is rumoured that Rosneft had to fight off competition from the likes of Saudi Aramco. Since Rosneft is state-owned, once the deal was agreed it had to be financed and structured in a way that did not fall foul of EU sanctions. Completion took 10 months from signing and two years from the parties agreeing a non-binding term sheet. As a condition precedent, the target’s creditors needed to approve the deal. It was widely reported that a handful of lenders were reluctant to give their sign-off, which delayed completion. The acquisition was a test of endurance, and a credit to those who made it happen. 

Restructuring 

WINNER: Mongolia Mining Corporation’s $900m restructure 

Financial adviser to ad hoc committee of bondholders: Moelis 

Financial adviser to Mongolia Mining Corp: JPMorgan, SC Lowy

The Mongolia Mining Corporation (MMC) has been a pioneer in the development of the country’s financial sector. In 2010 it became Mongolia’s first corporate to list on the Hong Kong Stock Exchange, and two years later the first to issue dollar-denominated bonds. In 2017, it posted another notable (though perhaps less desirable) achievement – being the first company to restructure an offshore bond. 

MMC’s financials started to suffer in 2015 when coking prices plunged, its bonds started trading around 16 cents on the dollar and it missed a coupon payment. At the same time, it was trying to win the concession to develop the country’s biggest coal deposit. MMC would only be awarded the concession if it were financially sound, which made a successful bond restructure critical. 

There was disagreement between bank creditors and noteholders about their respective rankings, and during negotiations one of the creditors decided to enforce. This led to PwC being appointed as a light-touch provisional liquidator to oversee the process. The restructure of about $900m-worth of debt consisted of a debt-for-debt exchange, the issuance of new debt and equity and the consensual restructure of a senior secured loan facility and promissory notes. 

The most innovative part of the new capital structure was a bond structured to be part payment-in-kind and part-cash coupon. The cash coupon was linked to the price of coal, to allow MMC to conserve cash if prices were low and allow investors to share in the upside if prices are high. 

Some 97% of creditors voted in favour of the restructure, which was implemented by way of parallel schemes of arrangement in the Cayman Islands and Hong Kong, followed by recognition in the US via Chapter 15 proceedings. It reduced MMC’s debt stack by $370m, and saw its bonds recover to trade at about 90 cents on the dollar. 

Securitisation and structured finance 

WINNER: SkyWorld’s sukuk musharakah programme 

Financial adviser and structurer: NewParadigm Capital Markets 

Lead arranger: United Overseas Bank

In late 2017, Malaysian property developer SkyWorld Development Group raised RM50m ($12.85m) via a debut issuance from its newly established RM600m sukuk musharakah medium term note programme. The notes are backed by payments that SkyWorld will receive from the sale of units in a residential development project in Kuala Lumpur. 

Via this transaction, SkyWorld has essentially sold the beneficial rights of owning these properties to sukuk investors. In the process, it has devised a novel new way of financing real-estate construction.

For SkyWorld, it is a clean funding solution. It uses the sukuk proceeds to refinance borrowings and fund working capital, and retains the option to use the funds to acquire new land on which it can develop. It represents an innovative way for property developers in sharia markets to manage their cash flows more efficiently.

To qualify under the musharakah programme, the Kuala Lumpur property needed to have committed buyers for its units. The building was not finished, which meant the securitisation had to be carefully designed to mitigate construction, revenue and liquidity risk. The property itself, which acts as the security, had to be rated and undergo rigorous assessment to ensure the issuer could meet its obligations to sukuk holders.

This was Malaysia’s first securitisation of progress billings and the world’s first sharia-compliant securitisation of progress billings. It has great potential for SkyWorld, which plans to fund the construction of its other eligible properties via the securitisation programme. The deal also has a social impact element; the building is SkyWorld’s first corporate social responsibility initiative under the government’s affordable housing scheme.