The credit crunch, now about a year in the making, has prompted asset managers across the globe to switch into cash and approach new issuance with the highest level of caution, leaving demand at rock-bottom and resulting in a record number of IPOs being postponed or pulled. And of the deals that have been completed, the great majority have performed poorly û thus reducing further the interest in future newcomers. It is telling that not a single IPO was priced either in Asia-Pacific or the US in September.
In the other categories too, the numbers convey a continued deterioration rather than signs of stabilisation, leading to the depressing realisation that for the primary markets at least, the best part of this year has come and gone. The glimmers of hope of a tentative recovery in ECM activity in the fourth quarter that were expressed by bankers during the summer months have been thoroughly squashed as the credit crunch has turned into a full-blow financial crisis, complete with high-profile bankruptcies and rescue takeovers of some of the worldÆs largest financial institutions.
Many bankers now expect no ECM activity of any significance in Asia for the rest of this year, and perhaps not for another six months. It may still be possible to do non-marketed follow-ons or block trades by taking advantage of brief windows of secondary market stability and there may still be a few rights issues by listed companies that need to raise capital for one reason or other. But IPOs are largely considered dead in the water.
ôI donÆt see how you can do any IPOs in Asia as it involves taking weeks of price risk,ö says one syndicate banker, referring to the fact that most markets in the region, including Hong Kong, Singapore and India, require the company to set a price range weeks in advance of the final pricing and trading debut. Not only does this make it extremely difficult for the underwriters to get the valuation right at times when excessive volatility can easily see the listed peers fluctuate by 5% to 10% in a day, but it also leaves investors open to the possibility that the overall market will take another tumble between the time they put in their order and the actual trading debut.
In Hong Kong, all eyes are currently on Renhe Commercial Holdings, which bucked the prevailing pessimism and launched the formal roadshow for an IPO of at least $540 million last Monday. The decision to go ahead, which came within days of two other Asian companies deciding to hold off on their equity fund raisings, was taken after three weeks of pre-marketing and after US private equity firm Warburg Pincus agreed to come in as a cornerstone investor and buy $50 million worth of shares. Anecdotal evidence suggests that other investors have been slow to convert tentative expressions of interest into actual orders so far, but there are also reports that Renhe has sufficient support from so-called ôfamily and friendsö accounts to get the deal out the door. In any case, it seems unlikely that the four bookrunners û BOC International, HSBC, Morgan Stanley and UBS û would have chosen to go ahead with the deal had they not been confident that they would be able to complete it.
The institutional offering will close on Thursday and the final price is scheduled to be set during the Asian morning on Friday. A successful deal could potentially work as a catalyst for other listing candidates in the pipeline, although most bankers say they advise their clients not to come to market at this time, unless they absolutely need the money.
The Dealogic data show that total ECM volume in Asia-Pacific (excluding Japan and Chinese A-shares) amounted to $78.4 billion in the first nine months of this year, a 50% drop from the same period last year. The third quarter had the lowest quarterly volume since the second quarter of 2003 with $15.4 billion. Revenues from ECM activities declined by 55%, to $1.4 billion in January to September and plunged 64% in the third quarter to a modest $324 million.
The overall numbers are dragged down by IPO volumes in particular, which dropped 57% to $19.6 billion in the first nine months, compared with a year earlier. In the third quarter, new listings raised a mere $4 billion, which is 72% less than in July to September 2007 and 38% below the IPO volume in the second quarter this year. Chinese companies accounted for $7.9 billion, or 40%, of the IPO volume in the region in the nine-month period, while India made up 25%. However, the majority of the $4.9 billion raised by market newcomers in India came from Reliance PowerÆs $3 billion IPO in mid-January just before the domestic secondary market turned from its record highs. The power producer has performed very poorly since it started trading, scaring potential investors off from participating in any other newcomers and contributing to a virtual halt in IPOs. In the third quarter, only $126 million was raised from new listings in India.
Another instrument that has ground to a virtual halt is convertible bonds, which is not surprising since the credit crunch has made it extremely difficult to hedge the credit element of the bonds. However, CB bankers rose to the challenge and came up with various ways to create synthetic borrow facilities to give the bondholders a chance to hedge the equity options, essentially shifting the investor focus from the credit to the equity portion of the bonds. Most of these new measures were adopted from practices that are already common in the US and so werenÆt truly innovative, but they did the trick and allowed issuance to continue û at a reduced pace û in the first six months of the year despite the challenging market. However, another collapse in share prices over the summer pushed prices on recently issued CBs as low as 60%-70% of face value in the secondary market and became a significant deterrent for frequent buyers to commit more money to the sector.
In recent weeks, the CB market has been thrown another curve ball as regulators in several countries have responded to the sell-off in financial sector stocks by temporarily banning short selling. While short selling can be used to take bets on a continued decline in share prices, it is also an important tool for hedging risk and a key element of the strategies hedge funds use with regard to CBs. As such, the ban is a significant blow to the industry. In the US and UK, the bans apply only to financial stocks, but Australia, South Korea and Taiwan have all imposed blanket bans on short selling in any type of company and in all three countries it is also unclear how long the restrictions will remain in place.
One CB banker notes that the speed with which these bans were put in place has left convertible investors very worried about what may come next. Until there is clarity on that front, he says, it is highly unlikely that there will be any new CB issues.
The Dealogic data show a 49% year-on-year decline in the volume of CB issuance in the first nine months to $15.6 billion. The third quarter saw only $3.3 billion worth of deals, which was the lowest quarterly total since the fourth quarter of 2002.
The only category of deals that has been on the rise this year is rights issues û but even that isnÆt particularly positive as it is a clear sign of the weakness in the capital markets and the effects of the credit crunch. As companies have failed to raise capital by other means they have been forced to return to the last resort û their shareholders. Companies with strong controlling owners who have the ability to underwrite the rights issues themselves are not surprisingly leading this trend û the $4.4 billion rights offering by IndonesiaÆs PT Bakrie & Brothers in the third quarter (the largest in the region this year) being a case in point. However, most of the rights issues have been priced at very deep discounts to the market and in several cases minority shareholders have decided not to participate.
In the first nine months, a total of $13.6 billion was raised from rights issues in Asia-Pacific outside Japan and the China A-share market, which is up 131% from a year earlier. Across the region, rights issues accounted for 32% of the overall follow-on issuance and in certain markets like Singapore and India it has become almost the ôpreferredö means by which to raise capital. According to one ECM banker, 70% of the total ECM volume in Southeast Asia this year came from rights issues, versus no more than 15% in a ônormalö year.
Globally, new issuance is in better shape with a 19% drop in overall volumes to $524.4 billion for the nine-month period and an 18% decline in the third quarter to $133 billion. However, much of this is due to the massive capital raising done by banks in the US and Europe to try and patch the holes in their balance sheets û thus not exactly a sign of strength. Finance sector capital raisings accounted for 40% of global ECM volumes, compared with 8% in the first nine months of 2007. J.P. MorganÆs $11.5 billion share offering marked the largest accelerated bookbuild globally both in the third quarter and in 2008 so far, while other large deals were completed by Merrill Lynch ($9.8 billion) and Goldman Sachs ($5.8 billion). Barclays raised $7.9 billion and $1.3 billion from two separate deals.
The overall ECM league table ranking for Asia-Pacific, ex-Japan and China A-shares, is led by Goldman Sachs with a 10% market share, followed by UBS with a 9.1% share and Citi with 7.2%. If you take Australia out of the equation, Goldman drops to sixth, while Citi moves to the top, followed by UBS and Credit Suisse.
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