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September 28, 2005

CS pulls out of CCB Investment, Stays in Underwriting Syndicate

China Construction Bank has begun pre-marketing with a full complement of underwriters - but without a planned $500m investment by Credit Suisse. A tip 'o the hat to our friends at FinanceAsia who scooped the story (even got credit from the Journal)

CCB's decision to drop CSFB's proposed investment was made last Thursday after it became clear the IPO would otherwise get delayed. This is because the only 'connected party' a bookrunner can technically allocate stock to is its own asset management arm unless it has received special regulatory approval.

CSFB, however, had been mandated late in the IPO process as a replacement for Citigroup, which had decided not to make a strategic investment in CCB and consequently been dropped as a bookrunner. As such, CSFB had not yet received special approval from the stock exchange by the time the IPO reached the final stages of listing committee approval and CCB did not want to wait around to get it.

At the same time, dropping CSFB was not really an option given its presence would mollify those members of Hong Kong's listing hearing committee who had been voicing concerns about the independence of fellow lead managers CICC and Morgan Stanley, both of whom have strong links to CCB.

As you may have read here previously, we think it somewhat odd that an underwriter who is being paid tens of millions of dollars could ever be considered "independent." Isn't that why the underwriters are not permitted to publish research during the blackout period? Who listens to brokers anyway?

What investors might find interesting is that, given a choice between being an investor and being an underwriter, CS would rather be an underwriter. What does that say about expected returns?

Posted by The Banker at September 28, 2005 12:23 AM

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