Small can be beautiful in difficult markets
Issuers shouldn’t shy away from small deal sizes and leaning on anchor investors to get them done
Companies often want to make a bang when they tap capital markets: notch some firsts, be market openers, unveil novel structures or sell the largest deals of their kind. But if there’s one time to avoid trying to make such headlines, and still make an impact with a transaction, it would be now.
Asia’s capital markets are in disarray. On debt, the region’s high yield bond market is all but shut as the crisis in the China property sector rages on. The rise in US interest rates added fuel to the fire, putting many borrowers into wait and see mode.
On equity markets, China-into-US IPOs — which had had a strong run until around the middle of last year — have dried up, while Hong Kong’s listing market is also floundering.
In Asia Pacific, 367 companies had listed by the end of the first half, raising $66bn, down 28% and 14%, respectively, year on year, according to data from EY. This is despite the region seeing two the largest global IPOs so far this year.
Covid-19 lockdowns, the war in Europe, rising inflation, US-China tensions, a spiralling property crisis in China and fears of a recession in the US have all been blamed for causing a torrid period for Asia ECM.
Bankers admit they have no real visibility on how the rest of the year is going to pan out; no crystal ball, and no idea on whether markets will stabilise or deteriorate.
Amid such uncertainty, companies shouldn’t hesitate to pull the trigger on their ECM deals.
Take the example of Chinese e-payments firm Yeahka, which reopened the equity-linked market in Asia this week after a lull of nearly three months. But it was sensible with its approach. It aimed for a modest size of $70m and held an extensive wall-crossing exercise ahead of launching its convertible bond.
The result? The company walked away with the funds it needed for expansion, the CB traded decently in the immediate aftermarket and Yeahka’s management team doesn’t need to worry about waiting for a big revival in sentiment.
Others with funding needs should follow suit. Hong Kong has already seen a number of companies list in the past month. The majority raised under $100m in proceeds — having initially aimed for much larger targets, some as much as $500m, and with that higher valuations.
A chunk of them also placed a big portion of the shares on offer with cornerstone investors, giving the issuer some guarantee that its deal will get past the finish line — hopefully with somewhat stable secondary market performance.
This is no bad move given the volatility in stock markets this year.
Safeguarding deals with cornerstones, or launching trades with a fixed price as opposed to a range, and having plenty of visibility on demand ahead of launch are all sensible tactics.
Investment banks should be willing to suggest these to clients, and issuers should become equally willing to embrace them if needed.
There is no mad rush. But with companies in Hong Kong likely to soon head into blackout periods ahead of reporting their latest financials, with the traditional summer slowdown in August looming, and with plenty of unknowns up ahead in September, firms with equity funding needs shouldn’t stay on the fence anymore. It’s time they leapt forward.