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Whole new level All for one and one for all – that seemed to be Alibaba’s motto when it came time for the internet giant’s record-setting IPO. Levelling the playing field turned out to be good business for all concerned in the US$25bn deal. In the old folk tale, only Ali Baba knew how to access the secret cave of treasure. However, with the largest IPO in history, the real-world Alibaba has done a particularly good job of spreading the wealth around. The company’s New York Stock Exchange debut this year is already the stuff of legend; Alibaba shares have risen nearly 70% in less than two months. Yet the success of the US$25bn sale, one of the most eagerly awaited listings ever, was hardly pre-ordained. Chinese companies pursuing US listings have a decidedly mixed record. The e-commerce giant itself had already faced down one stock crisis in Hong Kong, where Alibaba.com was delisted in 2012, and founder Jack Ma was warned to pay heed to the troubles of previous mega-deal IPOs, such as Facebook’s disastrous debut two years earlier. At first, Ma considered doing another Hong Kong listing, but, as it became clear that the regulatory changes he considered necessary would take months (at least) to push through, he set his sights on the US market instead. Chinese culture, it is said, values collective effort over individual achievement – and Ma seemed determined not to repeat the mistake of Mark Zuckerberg, whose stumbling IPO was dominated by just one bank. For its adviser, the company turned to Rothschild, where Alibaba’s head of corporate finance had earned his stripes. There, head of Asian equity advisory Claire Suddens-Spiers and head of North American equity advisory Matthew Sperling crafted engagement letters for a syndicate structure that omitted the lead-left role typical in most US IPOs. Instead, there would be a level playing field among the six joint bookrunners selected: Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley and Citigroup. “It could have been incredibly combative,” said Anthony Kontoleon, head of global equity capital markets syndicate at Credit Suisse. “It could have been a client saying: ‘We are going to reward you at the end based on what we hear and create an incentive structure where [the banks involved] don’t collaborate’.” Still, it was not going to be anything like that. All the work was to be shared among teams of two banks – “Noah’s ark style”, as one participant put it – that would handle everything from prospectus drafting to legal documentation, roadshow materials preparation, offer structure, public relations, financial modelling and investor targeting.New way to do it None of the bankers invited had been told in advance where the kick-off meeting in Hong Kong on March 25 would be held, and all had to wait with their cars for a call with the location 45 minutes before start time – the Aberdeen Marina Club, where Alibaba had booked under the name of a non-existent industry conference. Every single attendee had to stand and state his name, to assure all present there were no journalists on hand. Even JP Morgan vice-chairman Jimmy Lee had to do it, and he was one of the most well-known people in the room – at least until Ma himself turned up, halfway through, to rally the troops. With the deal now live, the most important task for the bookrunners was to reach consensus on the top 150 investors likely to participate. Each bank submitted a list, including the expected order size from each account. The data were cross-checked with each investor’s largest-known previous IPO allocation, and everything was consolidated into one master spreadsheet. The process gave the syndicate further confidence that demand would be strong, even if market conditions were sour once the deal hit the road. “It was not the amalgamation of six banks’ best friends, which is sometimes what happens,” said a second senior banker on the deal. “There were pre-defined targets, pre-defined qualification and real
Calling Mrs Watanabe In September, Chinese e-commerce company Alibaba toured major investment centres across the globe as it sought to drum up investor enthusiasm for its IPO on the New York Stock Exchange. In Asia, the company took in Hong Kong and Singapore. The only major Asian investor base it failed to try and woo was Japan’s. It was a notable absence, particularly given that 32.4% of Alibaba is under the control of a Japanese citizen, Masayoshi Son, chief executive of SoftBank and Japan’s most dynamic entrepreneur. For Japan, the absence appears to confirm a slow, but steady drop in the importance of the country’s retail investor base to foreign equity issuers. International companies are able to access Japan’s retail investors (known colloquially as Mrs Watanabe) through the use of a unique format, called public offering without listing. This lets a corporate or shareholder sell a predetermined portion of shares in an IPO to interested Japanese investors without having to list in the country, provided it offers the shares for a minimum of two weeks. Until a few years ago, 10 or more international equity issuers a year would include POWLs on their deals. China’s big privatisation wave of the mid 2000s included POWLs on several IPOs, including those of Bank of China and Agricultural Bank of China. Hong Kong-based insurer AIA Group’s listing in 2010 came with a POWL for around US$400m that drew demand of around US$5.5bn. However, the number of POWLs has declined of late to barely a trickle. There was just one between January and November 2014 and that barely counts. Accordia Golf Trust completed its Singapore IPO in July and placed most of the stock into Japan through a POWL, but the golf courses it runs are in Japan and it only floated in Singapore because business trusts cannot list on the Tokyo Stock Exchange. Bankers say a combination of retail-investor choosiness and issuer reluctance amid sunnier equity conditions has served to stymie the number of deals that include the structure. Certainly, POWLs are seen as a defensive option, but IPOs have been extremely challenging for the past five years and only became easier in Europe in the past 18 months – a period that still includes moments when the market was closed – plus POWLs have not failed to deliver when used. So, what else has happened since the financial crisis – an event that neatly coincides with the drop in POWLs? Well, there are two banks with the reach into high-net worth individuals to make promises about what Japan can offer – Nomura and Daiwa. Nomura’s branch network and client base arguably puts it well ahead of its rival. However, in the immediate aftermath of the crisis, Nomura was reinventing itself – on the back of the acquisition of Lehman Brothers in Europe – into a global investment bank. The last thing the bank wanted was to undermine its ambitions by pitching a Japanese product that would typically account for somewhere between 3% and 25% of a transaction. Most banks pitch for the top global co-ordinator slot in any IPO syndicate and accept lower bookrunner positions if they are offered. A POWL-led pitch would be akin to aiming to be a lowly lead manager and, if a decision was made not to do the tranche, the bank could easily be excluded entirely. The situation has changed. Nomura has cut its cloth and, while it maintains global ambitions and is growing, most notably in the Americas, it is more willing to play the Japan card. Its investor base has seen the country slip back into recession and may have to look overseas once again for returns. Also, it is not just Mrs Watanabe checking her purse. The country’s largest state pension fund, the Government Pension Investment Fund, is about to start spending tens of billions of US dollars accumulating equities both at home and abroad, as part of a massive reweighting of its ¥127trn (US$1.08trn) portfolio. It is this asset shift that has brokers and banks rubbing their hands in anticipation. Could it al
Unexpected harvest It was supposed to be the year in which the long-awaited reversal of US Treasury yields forced a rethink on bond investors and cooled the breakneck growth of Asia’s G3 bond markets. As we now know, that didn’t happen, and 2014 instead turned out to be yet another showstopper for Asia’s new issue market. No, 2014 produced more of the same in Asia G3 – only much more so, with annual volume records again exceeding even the wildest dreams of a sell-side debt banker. All the boxes were ticked in primary: sovereign, investment grade, high-yield, financials, the whole spectrum of regulatory capital, and all with the frisson bankers love to get breathless about. Debut issuers were there, and so was size and complexity. But, putting breathlessness aside, it was the secondary Asian market which provided the real excitement in 2014. Tellingly, for those who see the Asian offshore debt market as a hugely inflated bubble, the region’s high-yield sector experienced a mini meltdown in August where prices in some counters including the Republic of Indonesia fell by as much as four cash points. Was that correction a warning, perhaps, of further meltdowns as the Fed’s rate normalisation triggers an even greater unwind? Only time will tell. If there was anything that stood out in Asia’s primary markets, it was the FIG onslaught from China, together with a showstopping jumbo from China tech giant Alibaba. Issuance in Asia, excluding Japan and Australasia, came in at US$192.6bn for the IFR review period, an increase of 33% over the US$144.9bn which printed over the same period in 2013. In the more conventional calendar, the US$200bn landmark would be a distant memory by the end of the year. The markets managed to avoid a rerun of May 2013’s “taper tantrum” when the withdrawal of the Federal Reserve’s stimulus was first mooted and the actual event went off with barely a ripple. Still, in certain quarters the sharp reversal in Treasury yields in October might be regarded as ominous – at least among those who, like myself, are expecting a secular reversal of the 30 year-odd Treasury bull market. “There have been some discrete elements in various Asia countries that have helped drive issuance, most obviously in India and Indonesia with the election of Modi and Jokowi.” “I think everyone has been surprised by the path interest rates took in 2014 and you would have to say that at the beginning of the year the market consensus for long term rates was off the mark. Certainly I don’t think many players expected the 10-year Treasury to end up at 2.3%,” said Herman Van Den Wall Bake, head of debt capital markets for Asia Pacific at Deutsche Bank in Singapore. “And Asian primary wildly exceeded expectations. Most of us thought that 2014 would equal or slightly better last year’s print, but again I don’t think anyone expected it would exceed by such a high margin, of more than 30%.”New catalysts There were some specific elements in Asia which powered the new issue accelerator in 2014. New leaders in India and Indonesia in the shape of Prime Minister Narendra Modi and President Joko “Jokowi” Widodo, and tight liquidity onshore in China, have pushed more issuers from those countries offshore. “There have been some discrete elements in various Asia countries that have helped drive issuance, most obviously in India and Indonesia with the election of Modi and Jokowi,” said Deutsche’s Bake. “That has convinced the market that the drag on efficiency of bureaucracy will be cut, and that infrastructure will become the core focus. It has created a strong tailwind for issuance.” The issuance effect in India was especially pronounced following Modi’s May election victory. A signal effort was the opening up of the India high-yield space, thanks to a reduction in withholding tax for Indian issuers bringing offshore deals from 20% to 5%. High-yield deals were brought in October for Indiabulls and JSW Steel with an India high-yield pipeline said to be build