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A lorry load of bookrunners |
Postal Savings Bank of China’s September IPO was the biggest worldwide for two years, raising $7.4 billion. It also set another record: the highest number of bookrunners ever wedged into a single deal, at 26.
There was a time when three would have been considered ample, but the modern stance of Chinese capital markets mandates is to keep everybody happy – or nobody, given the dilution of fees between so many bankers. The front cover of the prospectus looks like an attempt to fit every logo in contemporary global and Chinese investment banking on to a single page.
On first glance, $7.4 billion between 26 managers does not seem quite so outlandish: that’s $284.6 million to place per bookrunner. The problem is, that’s the wrong calculation, since $5.7 billion of the deal is allocated to cornerstone investors, mainly fellow state-owned enterprises such as Shanghai International Port Group. So there’s only about $1.7 billion of equity that needs to be placed – that’s only $65.4 million per bookrunner, a level one might more commonly associate with a lowly co-manager.
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26 into one does go. The Postal Savings Bank prospectus and its many banks |
Not equal
Then again, not all bookrunners are created equal. Another trend of Chinese deals is that banks are given that important title despite having clearly quite junior levels in the syndicate. The five that are actually running the deal are called sponsor banks: CICC, Morgan Stanley, Bank of America Merrill Lynch, Goldman Sachs and JPMorgan. UBS is alongside them as a sole financial adviser. A second tier of joint global coordinators (which in most deals is the title given to the most senior banks) comprises DBS, China Merchants Securities, HSBC and Citigroup.
The third tier of joint bookrunners and lead managers embraces most of the banking names in China and Hong Kong, plus Nomura and Deutsche Bank. Possibly the only big name in international investment banking that did not get on the deal was Credit Suisse.
There appears to be no co-manager level below that, possibly because there were no banks left to appoint. Those in the upper tier consider themselves to be the only true bookrunners, with all the other roles just a question of semantics and politics.
“I know who did the deal,” says a source at one of the five sponsors. “Everyone at all levels of the book knows who did the deal.”
The prospectus says PSBC would incur total listing expenses of Rmb88.73 million ($13.29 million), assuming a listing at the mid-point of the offer price range (in practice it will be a little lower as it priced at the low end), most of which will be underwriting fees. It is understood that the top five sponsors are taking a gross 1.1% commission, which is low compared with the 2% to 3% more commonly applied to mainland IPOs in Hong Kong, but is slightly compensated for by the size. It is understood that there is also a 0.5% incentive fee, though the issuer’s criteria for awarding it are unclear.
This is how these deals work. Yes, it limits the amount available for everyone else, but a deal this size in this market could not be done without them - Anonymous
Banking shenanigans apart, what are investors buying? This is, after all, a challenging time to list a Chinese bank, with China itself slowing down and its banks under increasing scrutiny. The appeal of PSBC is that it offers the largest number of outlets among Chinese commercial banks – 40,057 covering 98.9% of all Chinese county areas, to be precise – and the fifth most assets and deposits in China.
“We are distinct from other commercial banks in China in a number of important respects,” says PSBC in its prospectus. “Firstly, we have a unique operational model”, combining directly-operated outlets and agency outlets (post offices). “Our distribution network is the largest in China’s banking industry with the widest geographical coverage.” PSBC is all about retail, cross-selling, a low cost of funding and relatively low-risk assets (its NPL ratio of 0.81% is lower than any large peer).
That’s a compelling sell, and those close to the deal say it was covered in two hours, which raises the question why it was necessary to bolster the offering by giving fully three quarters of it to cornerstones?
The attitude to the cornerstones varies among mainland and international names Euromoney contacted; mainland institutions speak of them with pride, seeing them as evidence of a well-supported deal, while internationals tend to see them as an inevitable part of a jumbo Chinese deal.
“This is how these deals work,” says one. “Yes, it limits the amount available for everyone else, but a deal this size in this market could not be done without them.”
So it proved: he was speaking before pricing, but at the low end of the range it appears the deal would not have got far without the cornerstones.
Further to the IPO, the bank is seeking to raise almost the same amount again in debt by selling tier-2 securities. The reason for such a large volume of capital raising in a short period of time is about the balance sheet: bigger banks (that is, the big four plus Bank of Communications) have a lot more regulatory capital, and its current capital adequacy ratio of 10.26% is fine for the moment but below the 10.5% minimum requirement that will come into effect in 2018.
