Wednesday, 12 December 2018

Institutions take the lead

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The IPO market is finally reopening, but this time institutions will be key and internationalisation should result. Owen Wild reports.

In mid-2008, equity capital markets bankers covering the Middle East relocated from London to Dubai. Once Morgan Stanley, Goldman Sachs and Credit Suisse had made the first moves, other banks had to follow to avoid any sense that they were less committed to the region. Yet since then, markets have collapsed and issuance has been low.

“Many people are looking around for ways to come back,” said one of the bankers that initially made the move but has since changed roles and relocated in Europe. “It hasn’t been hard to keep busy as there are plenty of opportunities, but markets are so weak you knew many of them would not happen.”

It is only in the last quarter of 2010 that there are the first signs that things are changing and issuance from the region could be on the up. Yet the response to the first major initial public offering from the Middle East of the year in the form of Omani mobile telecoms provider Nawras showed the nervousness that lingers from investors – and also for bankers and corporates.

The IPO came on the back of a handful of small issues from the closed market of Saudi Arabia and a convertible bond for Dubai-based Emaar Properties. The lengthy timetable for Omani issues meant that Nawras was already in the market when Emaar raised US$500m through convertible bonds, but the success of the issue showed that international investors were again willing to commit to the region.

The significance of the Emaar deal to the region was illustrated by the extensive preparatory work needed to get investors on-side. When first pitched a convertible bond from Dubai, investors laughed, only to then be told that it would come from the real estate sector. But when US$3bn of demand was collected in a matter of hours for the US$500m issue, it showed how investor attitudes had changed and gave bankers and issuers increased confidence about the potential for straight equity issuance.

Retail cool

On October 12, the up to OR234m (US$607.8m) IPO of Nawras was extended for an additional week of bookbuilding. The marathon deal was launched in late August, with management completing nearly a month of roadshows alongside bookbuilding, ensuring that the one-week extension prompted fears over the quality of the book.

Local reports quickly suggested that the retail portion of the deal was only 5%–10% covered and while bankers on the deal warned not to put too much weight on those particular numbers, they added that institutional demand was strong and sufficient to see the deal through to completion.

The Nawras IPO marked a significant development for the Oman equity market as it was the first to use bookbuilding to set the price. Educating local investors about the process of bookbuilding and setting pricing was crucial to the process and there was always the potential for retail to be put off the deal or cut order sizes as they were unable to express their price sensitivity. Retail investors were asked to submit orders on the basis that the deal would price at the top of the OR0.702 to OR0.902 price range and they would then receive refunds if pricing came lower.

Retail interest was also expected to be impacted by the heavy losses suffered during 2008. In that year, the MSM 30 index of the 30 largest companies listed on the Muscat Securities Market reached a high of 12,164.54 on June 12, but by January 22 2009 it had collapsed to just 4,187.81. By mid-October 2010 the market was still down nearly 50% from the high at 6,500.

The lack of retail enthusiasm for new issues was backed by the results of the SR612m (US$163.2m) IPO for Abdullah Am Al Khodari Sons from Saudi Arabia, announced the same day as the Nawras extension. In Saudi Arabia, if there is sufficient demand up to 50% of a new issue has to be allocated to retail and this is typically the case. On Al Khodari, 41.5% of the deal was allocated to retail with all orders fully allocated.

International heat

The lack of excitement from retail on Al Khodari was directly countered by the success of the institutional bookbuild. Like Nawras, Al Khodari marked a rare use of bookbuilding to set the offer price. The difference was that an institutional bookbuild took place first so that when subscription opened for retail investors the SR48 price had been set, from a SR48–SR51 price range. Institutions took to the bookbuilding process and the entire deal was covered by institutional orders that were then scaled back to accommodate retail.

With Nawras also receiving the best support from institutions, including internationals, the result is counter to the perception prior to launch that domestic retail would be guaranteed thanks to the lack of issuance and the true measure of success would be whether internationals were willing to buy, and a rapid revival in emerging market interest has ensured they are.

“Emerging markets are currently witnessing a significant inflow of funds and a fair amount should be directed to Middle Eastern markets,” said Evans Haji-Touma, head of CEEMEA equity capital markets at HSBC. “Debt markets have reopened in the Middle East, with the Dubai Government and Emaar issues particularly prominent.

“While there is a time lag between the Middle Eastern markets and other index markets such as Russia, Turkey or Poland, this renewed fixed-income activity should act as a catalyst for re-opening equity markets as a reduction in funding cost should have a positive impact on underlying earnings and therefore valuations.”

Who’s next

Already in the market is an IPO for Aluminium Bahrain, which will see the company list both domestically and with GDRs in London. The privatisation should raise around US$500m. Also launching in mid-October was the IPO of Axiom Telecom, which is set to break the two-year new issue drought in the UAE. Significantly the telecoms company has also elected to list on the struggling Nasdaq Dubai bourse (formerly the DIFX), which has struggled to attract both liquidity and new listings.

The hope is that as Nasdaq Dubai and the preferred, but locally focused, Dubai Financial Market are now on the same trading platform, as of July 11, liquidity will improve as investors are now able to trade on both exchanges through one account. The consolidation of the two exchanges also saw minimum trading fees on Nasdaq Dubai reduced to the same level as for the DFM.

Nasdaq Dubai appeals as a listing venue for banks keen to internationalise the markets as only on Nasdaq Dubai can IPOs be conducted using a bookbuild and also include international investors. Internationals can trade DFM stock, subject to some foreign ownership caps, but not participate in new issues.

“Issuers increasingly understand that while there are benefits to local markets like the DFM, these markets can have their limitations,” said Chris Laing, co-head of CEEMEA ECM at Deutsche Bank. “The DFM requires only primary shares are offered at IPO, so if a company has no need for capital then that effectively stops a company from doing an IPO as it has no use of proceeds. That is not the case for Nasdaq Dubai and is one of several reasons why companies looking to IPO in Dubai should consider both exchanges, especially now that investors can now easily trade both post the DFM/ND merger.”

The Axiom IPO was a little delayed in launching due to the threat of a ban on Blackberry handsets, but is on track to be priced in mid-November, with guidance suggesting a deal of around US$300m to be completed by Deutsche Bank, Citigroup and Shuaa Capital.

It is not guaranteed that even a success for Axiom will lead to a flood of deals on the Nasdaq Dubai, as where the terms suit the DFM will still appeal. One banker currently working on a larger Dubai IPO for early next year said that the company would list on DFM, partly because of the ease of process for regional accounts that are still not comfortable with bookbuilding.

Equally he suggested that the link of the two exchanges was likely to favour DFM more by making international access easier to the larger market, rather than see a dramatic pick-up in local trading of the 11 companies that have ordinary shares or GDRs listed on ND.

The challenge for bankers is to harness the hoped for positive results of the IPOs of Nawras, Alba and Axiom and convert these into IPO mandates across the region. Yet the pipeline remains small as a near two-year lull means few companies that were looking at IPOs then are still in the same situation. The availability of cheap money in the local markets is also making it difficult to get the best quality assets to come to market, especially at current valuations.

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