Singapore state fund Temasek Holdings and the country’s sovereign wealth fund GIC, alongside other sovereign funds, will be investing an additional S$739 million ($590.1 million) into Citic Securities, a broking firm, which is raising $3.495 billion in capital via a placement of new shares to 10 institutional investors.
China’s largest brokerage by market value, Citic is planning to sell 1.1 billion new Hong Kong-listed shares at HK$24.60 ($3.17) each. This is a 19 per cent discount from Monday’s closing price.
Citic CLSA was the sole bookrunner, while Citic Securities International was the sole global coordinator of the deal. The 1.1 billion shares represent about 10 per cent of the total existing share capital at this time.
Cairnhill Investments, a wholly-owned unit of Fullerton Management, which is a wholly-owned unit of Temasek, will purchase 94.5 million shares. GIC will take up 78.5 million shares. Their respective stakes will be 0.78 per cent and 0.65 per cent in the total share capital of Citic Securities.
According to Citic, 70 per cent of the funds will be invested in developing flow-based operations, including margin financing, securities lending, equity derivatives as well as fixed-income, foreign exchange and commodities products. The remainder will be used to develop cross-border operations, build platforms and as working capital.
A FinanceAsia report has cited Moody’s Investors Services statements on the latest share placement, arguing that will enhance Citic Securities capitalisation, support business growth and strengthen its relationship with government-related entities like GIC, Temasek and Khazanah, who have bought stakes in the latest placement.
This comes in an environment where mainland Chinese brokers are experiencing rising liquidity and capital pressure from business expansion into capital intermediary and cross border businesses.
Citic’s ability to complete this deal indicates, in Moody’s assessment: “….strong access to capital, which will allow it to withstand current credit challenges facing the industry, including a broad shift toward more capital intensive businesses such as margin financing and principal investment.”
This investment comes amidst a stock market boom in China, with Chinese brokerages like Guotai Junan Securities and Shenwan Hongyuan Group selling shares to boost their earnings. The Shanghai Composite Index has surged 141 percent, even as the People’s Bank of China cuts borrowing costs.
According to a Reuters report, China is seeking new methods of reducing high long-term borrowing costs and inhibit capital generated from its looser monetary policy being deployed in speculative plays. Rather it wishes to deploy the capital in supporting its slowing economy. Beijing has attempted to cushion its economic slowdown by allowing banks to lend more this year, as well as cutting interest rates three times since November 2014.
Despite this increased monetary liberalisation, banks remain conservative and reluctant to commit to making long-term loans to businesses. This is in order to avoid bad debts.”Recent monetary easing has shown little effect on stabilising growth. There are concerns that money is flowing into the stock market instead of the real economy,” said to a senior economist quoted by Reuters.
Sovereign wealth funds have shown tremendous interest in this latest share placement, alongside other institutional investors.
Institutional investors purchasing shares in the latest placement include: China Cinda Asset Management-backed fund, Cinda Sino Rock; Kuwait Investment Authority; Malaysia’s Khazanah Nasional; Yunfeng Financial Holdings, backed by Alibaba’s founder Jack Ma and funds run by Fidelity Worldwide Investment, Och-Ziff Capital Management and Harvest Global Investments.
The Kuwait Investment Authority agreed to take up $476 million worth of the offering. Meanwhile, Malaysia’s state-owned investment fund Khazanah Nasional is matching Temasek Holdings. Each have pledged $300 million for their purchases, though Temasek that is being conducted through its Cairnhill Investments unit.
GIC has agreed to purchase $249 million worth of shares in the mainland securities house, while Cinda Sino Rock is purchasing the largest allocation of $749 million. Fidelity will invest $319 million, while US hedge fund Och Ziff has come in for $307 million. Yunfeng Financial is putting up $307 million, while Harvest Global Investors has pledged $256 million.
The diverse geographic spread of institutional investors is beneficial to Citic, and likely to add strategic value to its investments, enhancing its attractiveness to institutional investors. All the institutional investors are expected to be long-term holders in the company despite modest share dilution.