The equity fundraising plans of mainland Chinese companies have been disrupted by the summer's A-share rout, prompting many to try to restructure their plans or find alternative sources of capital.
At least six companies listed in Shanghai or Shenzhen have targeted a combined Rmb63 billion ($9.8 billion) via share sales, according to regulatory filings. However, these plans have stalled because of plunging share prices.
Unlike Hong Kong where follow-ons are mostly done through accelerated bookbuilds, A-share companies are required to announce their fundraising plans before submitting them to regulatory and shareholder approvals. They are required to disclose details including the maximum number of shares to be sold and the minimum selling price.
A slowing Chinese economy and the central government’s interventions in stock and foreign exchange markets are cited by analysts and bankers as key reasons for the freefall in share prices over the past two months.
Private share placements have been the most common equity fundraising plan for A-share companies because they can raise funds directly from a handful of institutions without having to market the plan to a large group of public investors, according to a China equity capital markets banker. “Private placements save a lot of work for both the companies and the underwriters,” he told FinanceAsia.
According to data provider Dealogic, Chinese companies listed on the mainland have raised a total of Rmb51.7 billion from private placements so far this year. That already exceeds the total amount raised in each of 2011, 2012, and 2013 and is close to last year's full-year total of Rmb53.2 billion.
Below the minimum
Mainland Chinese companies that have filed for private placements within the last two months have seen their share price plunge alongside the weak A-share markets. As a result, many stocks have fallen below the minimum selling price disclosed in the share sale filings.
Air China, for example, announced July 28 plans to raise Rmb12 billion from a private placement of 994 million A-shares at a minimum price of Rmb12.07 each, which at that time represented a 21.4% to the latest closing price.
The A-share market rout has sent Air China shares down by 53% to close at Rmb6.85 on Wednesday. Investors subscribing to the placement shares will now be paying a 75.6% premium over the current price.
“There is no way they can proceed with the placements because no institutions will subscribe when they can get the shares at a lower price in the secondary market,” a second ECM banker said.
One option for these companies is to cut the offer price while simultaneously increasing the number of shares to be issued. That is a good way to maintain the total proceeds unchanged but could face stronger opposition from existing shareholders because the effect of the share dilution will be higher, the second banker said.
Companies can also opt for other fundraising options, such as bank loans and domestic bonds, but the financing cost will likely be higher.
In any case, ECM bankers will have a tough time as they will have to redo the filings even if the companies make the slightest change to the share sale plans, the first ECM banker said.
Other companies with pending regulatory approvals for A-share placements include Hainan Airlines, Zijin Mining, Shanxi Securities, Wintime Energy and Hebei Steel.