This week was never going to be a busy one on ECM syndicate desks, following the recent turbulence on mainland markets that has had a domino effect on sentiment across Asia. In just the past month, trillions of dollars were wiped out of China’s markets as the country’s indices witnessed one of their worst routs, after what had been nearly a year of bullish activity.
The bust that followed the bubble saw the government and its many entities taking extraordinary measures to combat the volatility, that finally started to see some effect at the end of last week, with the Shanghai, Shenzhen and Hong Kong markets rallying.
Stocks across the three indices advanced slowly early this week too, then declined again, before regaining some momentum on Thursday when GlobalCapital Asia went to press. The topsy-turvy nature of the markets left issuers across Asia sitting tight on their equity-raising plans, spooked by the dented sentiment.
“It is going to be a quiet week,” one ECM syndicate banker had predicted when contacted by GlobalCapital Asia at the start of the week. “Everyone in Asia is cautiously watching Hong Kong and the rest of the world is torn between China and Greece. China is stabilising a bit, but everyone just needs a bit of a breather.”
Eurozone leaders held a marathon series of meetings to reach a decision on Greece’s debt restructuring, which had been in limbo for weeks. News emerged on Monday evening Hong Kong time that a bailout agreement of sorts had been reached, although it was dependent on Greece passing a slew of reforms demanded by the eurozone by Wednesday. Luckily, the country managed to get the proposal past lawmakers, although at great political cost to Prime Minister Alexis Tsipras.
But the continued wariness over Greece and China means that conversations with potential issuers in Asia will be dominated by a wait-and-see attitude until things are calmer and investors less risk averse, said a second ECM syndicate banker.
“It doesn’t make sense to come to the market now,” he reckoned. “Companies are cautious and investors are cautious so while things may be starting to look up now, no one knows which direction the market will go tomorrow.”
Blockbuster period?
Although these were the only blocks executed this week, bankers reckon more are on their way.
“I think it will be busy [for blocks] for the next three weeks or so,” said a Hong Kong-based senior syndicate banker. “There are opportunities to be found when some of the volatility is released. Quite a few [shareholders] made gains [during the bull market] and saw it evaporate now, so they will be less picky on pricing.”
This bodes well for the investor community, which is not yet ready to throw caution to the wind. The banker added that typically 80% of the decision on pricing of blocks is swayed by market conditions.
So while vendors, issuers and investors are continuing to have active conversations, finding a pricing level that appeals to all parties has become all the more important.
“Normally, you could get away with a 5% discount on shares,” he said. “But in this kind of environment, you need to give an additional 10% or 15% discount. So while investors are willing to dip their toes into the market, it’s about finding the appropriate pricing.”
IPO if you dare
“It’s business as usual in Hong Kong,” she said. “We are heading towards summer so it will be a quiet season soon, but the pipeline across the Street is sizeable and of good quality.”
China Railway Signal & Communications Corp (CRSC), which is seeking a chunky $2bn IPO, had its listing hearing with the Hong Kong Stock Exchange on Thursday (July 16). Sponsors Citi, Morgan Stanley and UBS plan to start pre-marketing the deal on Monday, July 20, and open bookbuilding a week later, say sources close to the situation.
But the decision to start testing investor appetite now was not taken lightly. Constant discussions were held between the leads and the issuer, and the deal’s sponsors were mostly pushing for a post-summer deal. But a source told GlobalCapital Asia that the issuer was “adamant” on doing the deal sooner rather than later.
“Maybe they are being pressured by the government to do it now to show their confidence in the market,” said the source. “We don’t really know, but the sponsors were more inclined to have them come out in September when things are calmer.”
There is faith however that CRSC’s strong credentials — it has been the largest rail transportation control system solution provider in the world in terms of revenue since 2009 — will give investors comfort and the deal will prove popular despite wider concerns.
Juicy discounts
“But people are more price sensitive than usual. So while the issuer might think its valuation should be at a premium to its comps, it will come down to whether people are willing to pay up for a quality name.”
The senior ECM banker at the bulge bracket firm reckoned that IPOs coming during turbulent times would have to shell out bigger new issue discounts. While there is no hard and fast rule, she said a discount of around 10%-15% to peers is typical during buoyant conditions for a quality issuer . If the company is bigger and a market leader in its sector, a smaller discount would also suffice. But when investors are risk averse, they could demand discounts of as much as 20%, she reckoned.
“New issuers have to be sensible on pricing,” she said. “The market is still open for issuance in Hong Kong, but it would be wise to leave a bit of room on the table for investors so stocks can trade well in the aftermarket.”
Bankers are also flagging up the possibility that those in the queue for an A-share IPO will soon start eyeing Hong Kong more actively as they find themselves shut out of the China market. The mainland’s regulator has halted new listings in the wake of the stock market meltdown, with no visibility on when deals will resume.
A horde of Chinese companies listed in the US also recently went private in the hopes of doing A-share IPOs in the near future. Those hopes have now been dashed.
“The A-share market is not a real stock market, as demonstrated recently,” said a head of north Asia ECM. “If I was a company I’d now think twice about listing in China. All those US-listed companies were pretty hasty in their decision to delist from there and come back [to China]. I don’t know what’s going to happen to them now, but it’s not a positive moment.”
Companies that are already listed, meanwhile, are expected to face a situation where they are unable to tap investors for fresh equity, say bankers. Those in desperate need for funds, particularly state owned names, are already starting to actively look at different channels by which to raise capital. And many are eyeing private placements as a way to move forward.
“A-share and H-share private placements are getting more and more in favour,” said an Asian equity strategist. “We’ve already seen a few China-listed companies do A-share private placements in the past week, and those listed there and in Hong Kong are evaluating costs on which would be better.
“In bad times, private placements work out quite well.”