Ruling the roost
It has been a busy first half of the year for the primary ECM market in Asia, with Australian and Chinese issuers leading the charge. Investor demand remains strong despite volatility and recessionary fears and bankers expect it to continue as issuers turn their attention to financing M&As and growth strategies, rather than merely recapitalising balance-sheets. Shankar Ramakrishnan and Fiona Lau report.
Australian and Chinese issuers have contributed to the bulk of issuance volumes in Asia this year, taking the batten from Indian and South East Asian issuers, which have been much quieter since the halcyon days of 2007.
In Australia, this issuance hyper-activity has been driven by a rush of balance sheet recapitalisation. It has been greeted by strong institutional investor demand that ensured almost every deal was placed successfully, irrespective of size. Overwhelming investor demand emboldened the banks in their approach to underwriting entitlement offers: it is now common to expect entitlement offers to be initially launched with the bookrunners underwriting only the institutional portion of the offers. Once these are successful they will go on the hook for the retail offer, which is sub-underwritten to institutions.
Australian entitlement offers usually open with a two-day offer for institutional shareholders, followed by a retail offer period, typically of three weeks. Shares cannot be traded during the institutional offer period but are freely traded when the retail offer begins.
Banks are exposed to market risk during the retail offer and, in the worst market days of 2008, ECM houses stopped underwriting the retail tranches of Australian rights issues. But as sentiment has improved, banks have removed this market risk by pre-selling deals to institutions, which are now being invited to bid for more stock than their pro-rata entitlement. This covers any potential shortfall in retail demand.
“The structure of the Aussie market has helped issuance,” said one senior banker. “In contrast to elsewhere in the world, the institutional investor community [in Australia] are focused on the domestic market, thus giving solid support to any domestic equity raisings.”
Fund managers identified an opportunity to acquire discounted equity early, he said. “They hardly participated in the secondary trading market in 2008 and waited for capital raisings triggered by liquidity events in 2009.”
Equity effervescence in China, on the other hand, was driven principally by optimism for the economy. The HK$9.8bn (US$1.26bn) Hong Kong IPO of China Zhongwang was the largest IPO of 2009 – followed by Vodafone Qatar’s Doha Securities Exchange float which raised US$950m. Zhongwang’s April IPO came long before the rest of the global equity markets recovery. Investors were betting on the Chinese economy recovering faster than the rest of the world due to its lively domestic consumption.
The Chinese government is doing its bit to sustain its 8% GDP growth this year, with plans to pour Rmb4trn (US$585.2m) into the country’s infrastructure, healthcare, education and environmental protection and energy conservation sectors over several phases. To promote consumption it has allocated Rmb5bn to help car owners replace old vehicles, and Rmb2bn for rebates to consumers who replace old household appliances. Investors are increasingly confident China can achieve its growth target this year, according to a Credit Suisse report.
Riding the wave of positive sentiment, a spate of Chinese companies are rushing to tap, or already have tapped, the IPO market. Lumena Resources and China Metal Recycling raised HK$1.15bn and HK$1.55bn, with stocks surging 19% and 22% on their trading debuts respectively. Such positive performance in the secondary market has helped entice issuers: the up to HK$1.67bn SEHK IPO of Chinese herbal shampoo maker Bawang International; the HK$2.18bn SEHK offering of Chinese sportswear manufacturer 361 Degrees International; and the HK$630m SEHK float of Chinese coal operator China Qinfa were all well covered.
Two US IPOs – Chemspec International and Duoyuan Global Water – also attracted overwhelming demand. The former, a Chinese chemical manufacturer, is set to raise US$72.8m; the latter, a water treatment equipment distributor, is targeting US$75m. There are also deals for China Metallurgical Group (US$1.5bn–$2bn), Chinacentral Pharmaceutical (US$1bn), Hong Kong Lung Ming Investment (US$1bn) and China National Pharmaceutical (US$750m–$1bn). A listing for Agricultural Bank of China in Hong Kong and Shanghai for US$20bn–$30bn is also on the cards for early next year, with bookrunners yet to be mandated.
“The appetite for capital raisings will continue in the second half of 2009 but given that a reasonable amount of balance sheet repair deals have been done already, these fund raisings are likely to be aimed more at funding M&As and growth strategies than just recapitalisation,” predicted one banker.
Recent deals in Australia followed that path: ANZ’s A$2.5bn institutional equity placement will fund the acquisition of RBS's Asian assets, while Santos’ A$1.75bn entitlement offer will fund capex and growth projects.