Shares of Chinatrust Financial Holding Co (中信金控) rose yesterday after the company said on Tuesday night it would buy a 30 percent stake of Nan Shan Life Insurance Co (南山人壽) for US$660 million, giving Chinatrust a foothold in the local insurance market.
At the same time, Moody’s Investors Service said its credit ratings on Chinatrust Financial and its banking unit, Chinatrust Commercial Bank (中國信託商銀), could be downgraded “if the Chinatrust group acquires a significant stake in Nan Shan.”
In Taipei trading, Chinatrust’s shares closed 0.74 percent higher at NT$20.5.
The stock — which climbed as much as 4.2 percent to NT$21.2 in the morning session — has advanced 47.48 percent this year. That compares with a rise of 0.43 percent on the benchmark TAIEX and a drop of 0.57 percent on the financial and insurance sub-index, figures from the Taiwan Stock Exchange showed.
“From a risk-return standpoint, we think this is probably not a bad deal for Chinatrust,” Citigroup analyst Bradford Ti (鄭溫煌) said in a client note yesterday, hinting that a 30 percent stake in Nan Shan was still less risky than a 100 percent stake.
“The deal gives it [Chinatrust] access to an asset that should help raise its domestic franchise within the financial space,” he said.
The Nan Shan share purchase has some implications for Chinatrust, however.
Based on a memorandum of understanding (MOU) signed on Tuesday, Chinatrust Financial would purchase a 30 percent stake in Nan Shan initially, with an option to increase its stake within three years.
In exchange, Chinatrust would sell a 9.95 percent stake to Hong Kong-listed China Strategic Holdings Ltd (中策集團) for about NT$20.8 billion (US$648 million) via a private placement.
As Chinatrust needs to issue a total of 1.127 billion new shares to China Strategic at NT$17.74 per share, a discount of 13.4 percent to yesterday’s closing price could be a “short-term overhang” on Chinatrust, Ti said.
It is also unclear at this point how Chinatrust will integrate Nan Shan to create a strong synergy in its wealth management business, he said.
Moody’s said yesterday that Chinatrust’s financial leverage would not initially experience negative effects from its purchase of the Nan Shan share, but rather would benefit from diversifying its income.
Eventually, however, “Nan Shan’s negative spread problem could more than offset the diversification and synergetic benefits to Chinatrust,” Moody’s warned in an e-mailed statement.
The ratings agency said it was too early to take any rating action on Chinatrust because only an MOU had been signed. A rating review will require a detailed evaluation of Nan Shan’s business and portfolio as well as how Nan Shan would be managed and how Chinatrust would finance the purchase of additional Nan Shan shares in the future, it said.
But the bottom line for the deal is whether China Strategic can obtain the regulatory approval needed to acquire a 97.57 percent shareholding in Nan Shan.
“The final outcome and timing of this is still uncertain,” Moody’s vice president Christine Kuo (郭書岑) said in the statement.
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