By PRUDENCE HO
HONG KONGâ€"One of the world's biggest initial public offering of the year, from one of China's biggest financial firms, is becoming a new challenge for Western banks already grappling with a listing drought in the territory.
Banks seeking a role in the US$6 billion IPO in Hong Kong of Chinese state-owned People's Insurance Co. (Group) of China Ltd. are being told they must bring in a pre-agreed amount of institutional orders and guarantee that they will buy any unsold shares in the Hong Kong tranche of the deal, people familiar with the situation said Thursday.
This requirement for a so-called hard underwriting on the PICC deal was added in recent days, as bankers sought to be named as underwriters for the planned July IPO, and it was unclear whether all the banks would agree.
The dilemma for many of the Western banks is that constraints on their capital could make it difficult to persuade bosses in New York or Europe that they should commit funds to an IPO, even for one with such a high profile. The risk for PICC, one of China's largest property insurers, is that banks will push for a lower valuation on the shares as a way to reduce the odds of having to buy shares, one of the people said.
Demands for hard underwriting are becoming more common on large Hong Kong IPO as companies seek to ensure that their deals get done, even in choppy markets. They also have leverage over banks, given the increased competition for roles from Chinese lenders in what has been the world's busiest market for IPOs in the last three years. Chinese banks that have lending relationships with many of the Chinese companies that ask for hard underwriting agreements are often more willing to agree to hard underwrite, say bankers.
Traditionally, share sales that haven't been able to garner enough demand get scrapped.
PICC's IPO, which will comprise listings in both Hong Kong and Shanghai, is expected to be the world's second-biggest IPO this year after Facebook Inc., and the offering could provide a much-needed boost for Hong Kong's IPO bankers.
The insurer has already hired China International Capital Corp., Credit Suisse Group AG and HSBC Holdings PLC as joint sponsors, which is a senior role in the deal and will take responsibility for the listing prospectus, another person said. But it was unclear whether they had all committed to hard underwriting or selling a predetermined amount, the person added.
The three banks as well as PICC couldn't be reached immediately for comment.
More than 10 banksâ€"a mix of foreign and Chinese playersâ€"made their pitches last week in Beijing for a job underwriting, or selling shares, in the PICC IPO, people familiar with the matter said Thursday. The Chinese banks were ABC International, BOC International Holdings Ltd, ICBC International Holdings Ltd., CICC, and CCB International (Holdings) Ltd., while the Western banks were Credit Suisse, Deutsche Bank AG, HSBC, J.P. Morgan Chase & Co., Macquarie Group Ltd. and UBS AG, they said.
PICC, the parent of Hong Kong-listed property insurer PICC Property & Casualty Co., has prepared a legally binding "hard underwriting" agreement that the banks are required to return this week if they want to join the deal, the people said.
One of the people said the banks have been told they can revise the terms of the underwriting agreement, but "the more you revise, the lower your chances of getting in." Another person said some of the Western banks that sought a role are consulting with their compliance and risk-management committees on how watertight these agreements are.
PICC is following the lead of Haitong Securities Co., which asked banks for a hard-underwriting commitment ahead of last month's US$1.68 billion IPO, the biggest in Hong Kong in five months, and of the IPO for Citic Securities Co. last October.
Haitong's shares were priced at the bottom of the proposed range and ended Thursday 2.6% below the IPO price. Citic Securities shares were priced toward the bottom of the range but have risen 14% since then.
Another Chinese financial institution, Bank of Shanghai, also is trying to get its bankers to provide more than the typical underwriting role as part of its planned US$2 billion IPO expected in Hong Kong and Shanghai next year. The lender, whose shareoholders include HSBC, has asked banks pitching for its share sale to also offer opportunities for business cooperation between itself, and the bank for the next three years. The cooperation can come in the form of help with offshore lending, creating equity products or private banking assistance, one person familiar with the matter said.
Bank of Shanghai couldn't immediately be reached for comment.
For all their extra work, bankers are earning less, as multiple underwriters on a deal become the norm, and fees fall. The fee on the ongoing US$1 billion IPO of London-based diamond merchant Graff Diamonds Corp, for instance, is 1.75% of the gross proceeds, according to preliminary prospectus, in contrast to fees of 2.5% to 3.5% that bankers stood to earn on an IPO five years ago.
Write to Prudence Ho at prudence.ho@dowjones.com
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