HSBC Holdings PLC HSBA

DJ 2nd UPDATE:PICC Group Seeks "Hard Underwriting" On Its US$6B Hong Kong, Shanghai IPO

--PICC Group asking banks to both hard underwrite and agree to specific number of orders

--Banks need to return binding agreement to PICC this week

--PICC Group plans to list in Shanghai, Hong Kong in July

--PICC Picks CICC, Credit Suisse and HSBC as sponsors to handle the listing

(Adds listing application submission in paragraph 3; list of sponsors in the 5-6 paragraphs.)

By Prudence Ho

Of DOW JONES NEWSWIRES

HONG KONG (Dow Jones)--A blockbuster initial public offering by one of China's biggest financial firms that should have been welcomed by Western banks grappling with a listing drought in Hong Kong is instead becoming a new challenge.

Already squeezed by competition from Chinese banks and falling fees, banks pitching for the US$6 billion IPO in Hong Kong of Chinese state-owned People's Insurance Co. (Group) of China Ltd. have been asked to both bring in a pre-agreed amount of institutional orders and to "hard underwrite" or guarantee that they will buy any unsold shares in the Hong Kong tranche of the deal, people familiar with the situation said Thursday. That goes against typical practice in the territory, the world's top venue for IPOs for the three years to 2011, where an IPO without enough demand gets scrapped.

PICC Group, one of China's largest property insurers, is listing in both Hong Kong and Shanghai in July after submitting a formal listing application to the Hong Kong stock exchange, in what is set to be the world's second-biggest IPO this year after Facebook Inc. The insurer's share sale will provide a much-needed boost for Hong Kong's IPO bankers. Last month's US$1.68 billion IPO of Haitong Securities Co., another one that asked banks for a hard underwriting commitment, was the biggest in Hong Kong in five months, but a far cry from the US$20 billion-plus deals that the city was home to a couple of years ago and made Hong Kong's IPO bankers among the most important part of investment banking operations in the region.

More than ten banks pitched last week in Beijing to underwrite the PICC IPO were a mix of both Chinese and foreign banks, people familiar with the situation said Thursday. The Chinese banks that pitched were ABC International, BOC International Holdings Ltd, ICBC International Holdings Ltd., China International Capital Corp., and CCB International (Holdings) Ltd., while the Western banks were Credit Suisse Group AG (CS), Deutsche Bank AG (DB), HSBC Holdings PLC. (HBC), JP Morgan Chase & Co. (JPM), Macquarie Group Ltd. (MQG.AU) and UBS AG (UBS), they said.

CICC, Credit Suisse and HSBC have been picked 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 couldn't be reached immediately for comment.

The Chinese insurer--the parent of Hong Kong-listed property insurer PICC Property & Casualty Co. (2328.HK)--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 that the banks pitching 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 that some of the Western banks that pitched are consulting with their compliance and risk management committees on how watertight these agreements are and if they can walk away from the deal if they add new terms.

The dilemma for many of the Western banks asked to hard underwrite is that bank capital is in short supply, and they will have a tough time convincing their New York or European heads that they should be committing funds to an IPO. 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. But a request for hard underwriting will incentivize prospective underwriters to push for a lower valuation, one of the people said.

PICC's request to banks comes as another Chinese financial institution is trying to get its bankers to provide more than the typical underwriting role. Bank of Shanghai, a bank based in the Chinese city with HSBC Holdings PLC among its shareholders, has asked banks pitching for its US$2 billion Hong Kong and Shanghai listing 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.

PICC Group and Bank of Shanghai couldn't immediately be reached for comment.

For all their extra work, bankers are getting paid less, as multiple underwriters on a deal become the norm, and fees fall. The ongoing US$1 billion IPO of London-based diamond merchant Graff Diamonds Corp, for instance, is paying bankers on the deal 1.75% of the gross proceeds, according to preliminary prospectus, in contrast to a 2.5% to 3.5% fee level bankers stood to make on an IPO five years ago.

-By Prudence Ho, Dow Jones Newswires; 852-2802-7002; prudence.ho@dowjones.com

(END) Dow Jones Newswires

May 24, 2012 08:57 ET (12:57 GMT)

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