September 21, 2023

DealBook: Britain Prepares to Sell Its Stake in Lloyds and Weighs a Breakup of R.B.S.

The chancellor of the Exchequer, George Osborne, at a Lloyds branch in London on Wednesday.Luke MacGregor/ReutersThe chancellor of the Exchequer, George Osborne, at a Lloyds branch in London on Wednesday.

LONDON — The British government is preparing to sell part of its holding in the Lloyds Banking Group and is weighing a breakup of the Royal Bank of Scotland, the chancellor of the Exchequer said on Wednesday.

The comments were the clearest sign yet of the government’s approach to the two banks, which were rescued during the financial crisis. Nearly five years later — and with a general election on the horizon — questions have been raised about when the government might be able to whittle down the taxpayers’ 39 percent stake in Lloyds and 82 percent stake in the Royal Bank of Scotland.

At the annual Mansion House dinner here attended by senior financial executives, the chancellor, George Osborne, said that the government was “actively considering options for share sales in Lloyds.”

While giving no timetable, he said that a sale of the first block of shares was likely to go to institutional investors, noting that Lloyds was in a “good position,” with investor appetite increasing.

But he said that any decision on the Royal Bank of Scotland — whose chief executive, Stephen Hester, surprised investors by announcing his departure last week — was still “some way off.”

One possibility was to split the bank’s troubled assets into a “bad bank.” In hindsight, Mr. Osborne said, “splitting R.B.S. into a good bank and a bad bank was probably what should have happened in 2008.”

Now, he said, “we will urgently investigate the case for taking the bad assets — those mistakes of the past — out of R.B.S.”

The Treasury, Mr. Osborne said, would look in particular at putting the bank’s British commercial real estate holdings and its Ulster Bank subsidiary into the “bad bank.”

But he added that “we’re not prepared to put more taxpayer capital into R.B.S. as part of this process.” He said that a decision on the bank would be made in the fall.

Some lawmakers and analysts had urged Mr. Osborne to use the Mansion House speech to dispel some of the uncertainty surrounding the two banks and present a clear timetable for when the government would start selling the stakes. Pressure on the government to do so is building ahead of the next general election, expected in 2015.

But for Mr. Osborne, the stake sales are just part of a longer list of banking issues he has to resolve before that election. He is expected to back proposals in a report by a parliamentary banking committee that was released earlier in the day to introduce criminal penalties against banking executives.

The 600-page report, which was commissioned by the Treasury, may have made for uncomfortable reading for many in the room on Wednesday evening, because one of the recommendations was to threaten banking executives with prison should they behave recklessly in their jobs.

Prime Minister David Cameron told Parliament on Wednesday that he was in favor of “penalizing, including criminal penalties against bankers who behave irresponsibly.”

Mervyn A. King, who is retiring as governor of the Bank of England at the end of this month, also spoke at Wednesday’s dinner. One of the jobs he is to pass on to his successor, Mark J. Carney, the former governor of the Canadian central bank, is to improve the stability of British banks.

“All our major banks remain highly leveraged,” Mr. King said. “And of course the two biggest lenders to the domestic economy remain largely in state ownership. It is difficult to imagine a banking sector like that making a real contribution to any economic recovery.”

Mr. King reiterated that there were clear signs of a modest economic recovery but that “growth is not yet strong enough.” Support for the recovery was still needed, he said, adding that “it will inevitably be a bumpy ride.”

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DealBook: In Hong Kong, Firms Bulk Up on Bankers to Bolster I.P.O.’s

Top officers of Sinopec Engineering on Monday. The company is seeking to raise as much as $2.24 billion in its Hong Kong offering.Bobby Yip/ReutersTop officers of Sinopec Engineering on Monday. The company is seeking to raise as much as $2.24 billion in its Hong Kong offering.

HONG KONG — After a lackluster 2012 and slow start this year, Hong Kong’s financiers are hoping to revive interest in initial public offerings. To test investor appetite, many companies are hiring armies of investment bankers in their efforts to market new shares.

In the three years through the end of 2011, Hong Kong had ranked as the world’s biggest I.P.O. market by the amount of money raised. Yet so far this year, new share sales have declined 14.3 percent, to $1.12 billion, from the same period a year earlier, according to Thomson Reuters data. Companies seem to believe that the answer to turn fortunes around is to employ large numbers of stock underwriters.

On Monday, the China Galaxy Securities Company, a midsize state-owned brokerage firm that is aiming to raise about $1.4 billion in its Hong Kong offering, hired 21 banks to help execute its deal. Those included big Wall Street firms like JPMorgan Chase and Goldman Sachs as well as the small Hong Kong brokerage units of mainland Chinese banks, according to a person with direct knowledge of the offering.

Sinopec Engineering, a spinoff from China Petrochemical, also started to promote an offering on Monday. It has 13 banks working on its deal, which seeks to raise as much as 17.4 billion Hong Kong dollars, or $2.24 billion.

The number of listed underwriters stands in contrast to big offerings in the United States. For instance, Facebook’s $16 billion listing, the biggest I.P.O. of 2012, involved 11 investment banks to help get the deal done.

Chinese companies appear to be making such moves as a way to price their deals as high as possible despite the risk that doing so could lead the shares to slump once trading begins.

“You’ve got a lousy market, and companies who don’t want to leave anything to chance to get their deals done, because they’ve seen so many deals go sideways,” said one capital markets lawyer in Hong Kong who declined to be identified, citing his relationships with banks. “The mentality is, why not just keep adding banks? It gives them more comfort.”

Just a few years ago, only a handful of banks were involved in large deals. From 2003 to 2009, a period defined by blockbuster Chinese privatizations, Hong Kong I.P.O.’s worth $1 billion or more usually involved two to four banks acting as underwriters, according to figures from Dealogic. That rose to an average of five to six banks on such deals in 2010 and 2011.

Last year, the figure soared to an average of 14 banks a deal — including the $3.6 billion offering in November by the People’s Insurance Company of China, which had 17 banks working on it.

Investment banks, however, worry that the trend toward more firms is making the market less profitable for new listings. Having so many competitors involved in a deal decreases everyone’s share of a fee pool that is fixed, sometimes to the point that helping sell an I.P.O. is no longer profitable.

“It’s not a very sophisticated way of doing things, and it ties up the whole street,” said one person with direct knowledge of the Galaxy offering, who spoke on the condition of anonymity because the details were not public. “As an industry, we should probably boycott these kind of deals, but when you’re talking about big, state-related Chinese issuers, it’s going to take a brave man to say no.”

China Galaxy Securities, for instance, is selling 1.57 billion shares at 4.99 Hong Kong dollars to 6.77 Hong Kong dollars apiece, according to a term sheet. The joint global coordinators of the deal are JPMorgan, Goldman Sachs, China Galaxy International, ABCI Securities and Nomura, with 16 other banks acting as underwriters. Representatives of the company could not be reached for comment. The deal is expected to price on May 15 and begin trading on May 22.

Sinopec Engineering is aiming to sell 1.328 billion shares at a price of 9.80 Hong Kong dollars to 13.10 Hong Kong dollars apiece, a separate term sheet showed. JPMorgan, Citic Securities, UBS and Goldman Sachs are joint global coordinators of the I.P.O., and an additional nine banks are acting as underwriters. It is scheduled to price on May 16 and begin trading on May 23.

The trend toward adding underwriters can lead to a host of problems, both for the banks that bring deals to market and for the people who invest in the regular part of the offerings.

Chinese companies are also relying increasingly on so-called cornerstone investors, who commit to buy a large part of an I.P.O. in advance. In Hong Kong, such investors agree to hold shares for a fixed period, usually six months. But sometimes more than half the total offering is being set aside for cornerstone investors, decreasing the liquidity, or the volume of shares available for trading.

Cornerstone investors have committed about $280 million to the China Galaxy Securities I.P.O., and $350 million to the Sinopec Engineering deal.

For Wall Street banks, being a small part of such deals can be a matter of keeping their names in front of investors and corporations, even at the expense of the bottom line. Participating in big offerings, in particular, helps banks raise their rankings among their peers, the so-called league tables used in part to evaluate bankers’ performance.

One person with direct knowledge of the two coming offerings cited previous deals in which fee income for banks went as low as $50,000. At such a level, the person said, the fee becomes meaningless, but participation still “gets you on the league tables.”

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DealBook: Telefonica to Sell Shares Back to China Unicom for $1.4 Billion

Telefónica, the largest European telecommunications operator by revenue, has agreed to sell back a 4.56 percent stake in China Unicom, part of an effort by Telefónica to reduce debt as the European financial crisis continues to hurt earnings in its main markets in Europe.

The agreement involves selling back more than one billion shares to China Unicom, listed in Hong Kong, for 1.1 billion euros ($1.4 billion). Telefónica said the sale would help improve its “financial flexibility,” according to a statement.

The deal is setback for the Spanish company, which has been active in the fast-growing Chinese mobile phone market since 2005.

Telefónica has been searching for ways to increase its cash reserves in an effort to service its more than $70 billion of outstanding debt.

Last month, the company announced plans for a share offering in its German subsidiary, O2 Germany, to raise capital. The Spanish company also said it was considering similar share sales at some of its 14 businesses in South and Central America.

Telefónica reported a 54 percent decline in first-quarter profit, to 748 million euros, as the number of Spanish customers fell 6.8 percent.

Telefónica’s shares rose 3.6 percent in late morning trading in Madrid on Monday. Its shares have fallen 22 percent in the last 12 months.

Telefónica will still hold a 5 percent stake in China Unicom, the second-largest mobile phone operator in the country after China Mobile. The Spanish company said it would not to sell any more China Unicom shares for at least 12 months.

The deal is expected to close by the end of July.

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Bank of America Plans Stock Swap to Cut Debt

The new stock would be issued in exchange for preferred shares currently held by investors. The bank’s shares have been battered recently amid fears about the effect of the debt crisis in Europe and other worries that have been hanging over financial companies.

The exchange, which could involve up to 400 million common shares, could allow the bank to raise $2.76 billion, based on Thursday’s closing price of $6.91.

Brian T. Moynihan, the bank’s chief executive, has long maintained that additional share sales are not necessary to raise capital. Bank officials said the move was not driven solely by the need to increase its capital cushion, but was also an opportunity to reduce debt and interest expenses.

The plan was outlined Thursday in a filing with the Securities and Exchange Commission. A decision is not final, but the bank is likely to go ahead with the exchange shortly, according to one official.

By saving money on interest payments on the preferred shares, the move to issue new common shares would not reduce earnings and could actually add to earnings in the short term, the bank said in its filing.

In addition, swapping shares of common stock for the preferred shares will add to the bank’s Tier 1 capital base, because under international regulatory standards preferred stock does not count as common equity while common stock does.

Because the preferred stock is trading below par value, Bank of America can buy it back from investors at a price above where it is trading, yielding a gain for those shareholders. But because it is still below par, it allows Bank of America to book a gain on the difference.

“We want to exchange one form of capital, which is very expensive, for another, which counts toward our Tier 1 common equity on terms that are economically favorable to us,” said Jerry Dubrowski, a spokesman for the bank. “Our goal is to have the strongest balance sheet we can have, and this is an important step.”

Shares of Bank of America have fallen nearly 50 percent in 2011, as the bank faces tens of billions of dollars in liabilities for its role in the subprime mortgage mess as well as a slowdown in other parts of its business. Further increasing the number of shares outstanding from the current level of 10.1 billion is unlikely to win favor with investors. As a result, Bank of America’s stock fell nearly 2 percent in after-hours trading.

This is the second time this week that the company has reversed course. On Tuesday, Bank of America announced it was calling off plans to impose a $5 fee on debit cardholders after an uproar by consumers as well as politicians in Washington.

Under Mr. Moynihan’s leadership, Bank of America has been busy shedding noncore assets and raising capital. In August, it sold half its stake in the China Construction Bank, adding $3.5 billion to Tier 1 capital. It is now the nation’s second-biggest bank, having recently lost the top spot to JPMorgan Chase.

The billionaire Warren E. Buffett invested $5 billion in the company in August by buying preferred shares. That deal did not count toward Tier 1 capital but was widely seen as a crucial endorsement of Bank of America’s management team amid growing doubts among investors. His shares would not be affected by the bank’s latest plan.

Shareholders are sensitive about issuing new common stock because it dilutes the bank’s earnings per share. In this case, the dilution equals about 4 percent. Bank of America’s share count exploded after the financial crisis of 2008, because the company used stock to buy Merrill Lynch and also issued shares to pay the government back for two bailouts totaling $45 billion.

The deal with Mr. Buffett could cause a 5 percent dilution and that, along with the 4 percent dilution from the plan announced Thursday, means “shareholders are being nickel and dimed here,” said Chris Kotowski, an analyst with Oppenheimer.

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