AmEx hedges a deal but still keeps ICBC stake
Source: Agencies |
August 8, 2011, Monday
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Print Edition
Print Edition
When Goldman Sachs executed a US$479 million block share sale in Industrial and Commercial Bank of China Ltd last week to help American Express Inc hedge its position in the Chinese lender, a wall of mystery surrounded the transaction.
Though the deal value wasn't huge, what sparked interest in it was the involvement of three large global and publicly traded institutions: ICBC, the world's biggest bank by market value, Goldman, one of the world's most influential securities firms, and American Express, another large United States bank making huge strides into China.
Furthermore, this could be a way for institutional or strategic investors to take short-term directional bets on Chinese banks without necessarily having to offload their positions and ruffling feathers.
The deal underscored the sensitivities and challenges of deal making in China. Before going through with its plan, American Express assured ICBC that it wants to retain its stake, two sources with direct knowledge of the matter told Reuters.
Typically, the sale of large strategic stakes is executed via block deals wherein underwriters take the chunk of shares to be sold on their books and then sell it to fund managers or other institutional investors.
When American Express concluded it was time to lock in profits from its US$200 million pre-IPO investment in ICBC, it decided to take a less trodden path.
The move to not dump in the market the 638.06 million shares, equivalent to a 0.74 percent stake in ICBC's Hong Kong-listed shares, could have been guided by political sensitivities, sources said. Creating a hedge will also limit American Express's capital requirements under Basel III.
"If AmEx can show that it is fully hedged and there is no market risk, then they don't have to include it in their risk-weighted assets," one banking analyst said.
The deal comes at a time when analysts and ratings agencies such as Moody's Investors Service have raised concerns about Chinese banks' exposure to poor-quality local government debt.
The solution was to structure a hedge, enabling American Express to keep its ICBC stake. Details of the deal weren't entirely clear, but one source said American Express could have bought a put option from Goldman Sachs.
A put option gives the owner the right, but not the obligation, to sell a specified amount of shares at a specified time.
Late last Monday, Goldman launched a block deal to sell 638.06 million ICBC shares. The term sheet named Goldman Sachs International as the seller, but added it was acting "as a hedge for a third-party client facilitation transaction."
Some sources said it would have been easier for Goldman Sachs to execute such a deal because it had more than enough shares of ICBC to lend to American Express.
Goldman sold the shares to offset the long position created by the transaction. When the contract expires, Goldman will have to buy back the same number of shares from the market so that it is not left with a short position on its book.
At the end of the transaction, American Express will continue to own the stake in ICBC, but it is totally immune to the market fluctuations. ICBC shares are down 2.8 percent this year, adding to last year's 8.4 percent fall.
Both Goldman and AmEx declined to comment.
"The benefit of such a structure is that AmEx could limit any downside in the stock," one person, who was not involved with the deal, said. The person has previously worked on structured transactions.
American Express paid US$200 million to buy 1.28 billion Hong Kong shares of ICBC in 2006 as part of a group of strategic investors before ICBC's IPO. When the lock-up expired in April 2009, American Express sold half its stake for some US$310 million. The latest transaction would help American Express to reap about five times the return on its initial investment.
American Express wanted to lock in the tidy return before sentiment for Chinese bank stocks dip further.
Chinese bank shares have been under pressure partly on concerns of slowing loan growth and mounting worries about bad debts.
Though the deal value wasn't huge, what sparked interest in it was the involvement of three large global and publicly traded institutions: ICBC, the world's biggest bank by market value, Goldman, one of the world's most influential securities firms, and American Express, another large United States bank making huge strides into China.
Furthermore, this could be a way for institutional or strategic investors to take short-term directional bets on Chinese banks without necessarily having to offload their positions and ruffling feathers.
The deal underscored the sensitivities and challenges of deal making in China. Before going through with its plan, American Express assured ICBC that it wants to retain its stake, two sources with direct knowledge of the matter told Reuters.
Typically, the sale of large strategic stakes is executed via block deals wherein underwriters take the chunk of shares to be sold on their books and then sell it to fund managers or other institutional investors.
When American Express concluded it was time to lock in profits from its US$200 million pre-IPO investment in ICBC, it decided to take a less trodden path.
The move to not dump in the market the 638.06 million shares, equivalent to a 0.74 percent stake in ICBC's Hong Kong-listed shares, could have been guided by political sensitivities, sources said. Creating a hedge will also limit American Express's capital requirements under Basel III.
"If AmEx can show that it is fully hedged and there is no market risk, then they don't have to include it in their risk-weighted assets," one banking analyst said.
The deal comes at a time when analysts and ratings agencies such as Moody's Investors Service have raised concerns about Chinese banks' exposure to poor-quality local government debt.
The solution was to structure a hedge, enabling American Express to keep its ICBC stake. Details of the deal weren't entirely clear, but one source said American Express could have bought a put option from Goldman Sachs.
A put option gives the owner the right, but not the obligation, to sell a specified amount of shares at a specified time.
Late last Monday, Goldman launched a block deal to sell 638.06 million ICBC shares. The term sheet named Goldman Sachs International as the seller, but added it was acting "as a hedge for a third-party client facilitation transaction."
Some sources said it would have been easier for Goldman Sachs to execute such a deal because it had more than enough shares of ICBC to lend to American Express.
Goldman sold the shares to offset the long position created by the transaction. When the contract expires, Goldman will have to buy back the same number of shares from the market so that it is not left with a short position on its book.
At the end of the transaction, American Express will continue to own the stake in ICBC, but it is totally immune to the market fluctuations. ICBC shares are down 2.8 percent this year, adding to last year's 8.4 percent fall.
Both Goldman and AmEx declined to comment.
"The benefit of such a structure is that AmEx could limit any downside in the stock," one person, who was not involved with the deal, said. The person has previously worked on structured transactions.
American Express paid US$200 million to buy 1.28 billion Hong Kong shares of ICBC in 2006 as part of a group of strategic investors before ICBC's IPO. When the lock-up expired in April 2009, American Express sold half its stake for some US$310 million. The latest transaction would help American Express to reap about five times the return on its initial investment.
American Express wanted to lock in the tidy return before sentiment for Chinese bank stocks dip further.
Chinese bank shares have been under pressure partly on concerns of slowing loan growth and mounting worries about bad debts.
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