HONG KONG (Reuters) - As Chinese banks prepare to raise $55 billion in the country's first preferred share offers, foreign investment banks with experience in structuring such deals are ready to pounce on a potential $275 million in underwriting fees.
And some are more ready than others.
Goldman Sachs was one of the first to spot the potential in China for preferred shares, a form of hybrid security which listed companies can sell to raise capital with minimal dilution in the value of shares held by existing stakeholders.
While preferred share issues are prevalent in Europe and the United States, China gave the green light for these securities just last year to open more fund-raising avenues.
In April, the regulators opened the door for banks to issue preferred shares in a bid to bolster the lenders' finances against an expected rise in bad loans as the economy slows. Banks also need funds to comply with the stricter capital adequacy requirements under the global Basel III rules.
Goldman moved one of its global experts on hybrid securities to Asia five years ago to begin talks with Chinese clients. Now, Goldman Sachs Gao Hua, the Wall Street bank's Chinese unit, is among the underwriters on three deals - the biggest number among its international peers.
"The fact that we were there several years ago...we didn't just show up for the beauty parade," helped win the mandates, said Dominique Jooris, Goldman's head of credit capital markets in Asia ex-Japan.
Jooris, who is from Belgium, co-authored a book in Chinese on preferred shares with Rita Chan, the bank's head of China debt capital markets, titled "The Rise of Another Dragon: The History and Opportunities in Hybrid Securities."
Credit Suisse Founder Securities, the Swiss bank's local joint venture, is on two deals and UBS Securities on one.
Six banks are planning to raise funds from preferred share sales in the near future. Shanghai Pudong Development Bank Co Ltd is likely to be first, with a 30 billion yuan ($4.9 billion) issue, while the biggest planned issue is Bank of China Ltd's 100 billion yuan private placement.
Companies such as gas and coal mining firm Guanghui Energy Co Ltd and China State Construction Engineering Corp Ltd also have issuance plans.
"The first issuers are expected to be the banks, but then there will be some interest from other corporate issuers as well," said Antony Dapiran, a partner at law firm Davis Polk & Wardwell in Hong Kong. "It seems to be something that's gotten some interest in the market."
Preferred shares have the characteristics of both debt and equity, and typically don't trade on the open market or carry any voting rights. China's regulator had stipulated that preferred share issues to the public must not contain provisions that allow these shares to be converted to common equity.
QUITE A COUP
Winning mandates for preferred share issues in China is quite a coup for global banks in a market dominated by domestic firms. Chinese investment banks have a virtual monopoly of local capital markets, with no international bank among the top-10 underwriters of equity or bond deals so far this year. The global firms' expertise in handling preferred share deals could help them kick down that door.
"The international banks have the experience in doing these in other markets, so they have an edge on the domestic banks," said a person involved in upcoming offerings who was not authorized to speak publicly on the matter. "Domestic banks have never seen or worked with anything like this before and don't necessarily know how to market this to clients."
Working with the international banks are Chinese brokerages including Citic Securities and China International Capital Corp (CICC).
Likely buyers include insurance firms and pension and hedge funds, bankers and capital markets lawyers said, as well as equity funds looking for a defensive bet through the shares' regular coupon payments. Chinese trust companies may also be interested, as they could repackage the preferred shares and resell them to retail investors in small chunks.
The deals aren't likely to happen all at once, so the underwriting fee pot is likely to be stretched over time. Industrial and Commercial Bank of China Ltd (ICBC), for example, can issue its preferred shares over a 36-month period. Because they're new, preferred share issues may also take time to win regulatory approval.
Investment banking fees in Asia ex-Japan have risen more than 15 percent to $6.8 billion so far this year, driven by an increase in equity capital markets activity in China, according to Thomson Reuters/Freeman Consulting Co estimates. Fees on China equity deals have more than doubled to $1.83 billion as initial public offerings resumed after a year-long hiatus.