Bankers pin new-year hopes on block trades

While IPOs will remain challenging, a desire among investors to secure remaining profits combined with a need for issuers to put cash to work may keep the equity capital markets going in the first quarter.
It will come as no surprise that equity capital markets volumes in Asia ex-Japan ended 2008 down 67% from the previous year. After all, this was the trend for much of last year and, even without the extended global financial crisis that followed Lehman BrothersÆ collapse in mid-September, it is doubtful whether ECM volumes would have been able to exceed half of the previous yearÆs record numbers.

The first quarter of 2009 û and probably the second as well û is expected to remain extremely challenging in terms of new issues as the financial crisis has now turned into a full-blown recession in countries like the US, Japan, Hong Kong and Singapore, resulting in renewed concerns about corporate earnings. However, equity bankers are cautiously optimistic that there will be some block activity over the next few months as existing shareholders continue to reduce their equity exposure or secure some of the profits that they are still sitting on. Some companies may also be forced to raise new equity, although given the choice, most would likely prefer not to dilute their existing share capital at current valuations.

Like everything else, both blocks and follow-ons were few and far between in the final four months of last year, but bankers say a potential pickup in this type of activity could be driven by the fact that sellers now realise that it will take a long time before share prices return to levels where they traded 12-15 months ago. At the same time, there are plenty of investors who are sitting on large cash positions that they will need to invest if the equity markets start to stabilise or trend slightly upwards û otherwise they will run the risk of underperforming their peers. This means that as long as the stock is offered at a large enough discount to compensate for the current high volatility, there should be buyers out there.

Indeed, as the Asian equity markets staged a minor recovery in the final week before Christmas, bankers were sounding out a few potential block trades and KoreaÆs KB Financial Group, the new holding company of Kookmin Bank, raised $296 million from the sale of treasury shares at an 8% discount in what marked the first share placement of size by an Asian company in almost three months. And on New YearÆs Eve, UBS announced that it had sold all its 3.4 billion H-shares in Bank of China (bought before the IPO in 2005) through a placement to 15 institutional investors. According to various newswires, the shares were sold at a 12% discount to the latest close, resulting in a total deal size of about $808 million.

ôThe market will open for blocks and follow-ons first. There may be a few IPOs in the first quarter, but they will likely have to be pre-placed to a certain degree,ö says one equity syndicate banker.

The companies most likely to attempt an IPO early this year are those that have already received a listing approval from the regulators and who will have to apply again if they donÆt make use of it before their financial numbers go stale. The Hong Kong Exchanges and Clearing said last week that there are 25 companies with approval to list on Hong KongÆs main board that have not yet listed û not counting the 113 approvals that have either been withdrawn or allowed to lapse during the past year.

One of the key things weighing on the new issuance market in 2008 was the growing risk aversion among investors. This may have been initially driven by global events but gained pace as most new Asian issues that did come to market quickly fell below the issue price, leaving investors with sizeable losses and even less appetite for the next new offer.

According to preliminary data from Dealogic, Asia ex-Japan saw a total of $58.8 billion worth of equity transactions in 2008 (excluding A-shares), down from $180.8 billion in 2007 and $125 billion in 2006. Initial public offerings, with their longer lead time, suffered the most with the new issue volumes falling 72% to $18.9 billion from $68.0 billion in 2007. IPOs as a portion of total ECM volumes dropped to 32.3% from 37.6%. Convertible bonds were also difficult to get out the door amid poor availability of credit, restrictive pricing regulations in India and, in the final quarter, bans on short-selling in Taiwan and Korea. CB issuance volumes dropped by 63% to $11.7 billion from $31.6 billion.

Follow-ons were somewhat easier to sell, although smaller deal sizes meant that total volumes still fell 65% to $28.1 billion from $81.2 billion. Follow-ons as a percentage of total ECM volumes increased slightly to 47.9% from 44.9% a year earlier, although a large portion of that increase was due to rights issues. Rights issues have experienced something of a revival over the past 12 months as many companies were forced to turn to existing shareholders to raise capital when other investors turned their backs û especially when it came to large capital raisings. Dealogic data shows that the value of rights offerings more than doubled to $15 billion from $6.9 billion in 2007 and the proportion of rights issue to total equity issuance rose to 26% in 2008 from less than 1% a year earlier. The shift towards rights issues was particularly strong in India and Singapore where they accounted for about 85% of all follow-on capital raised during the year.

Indeed the two largest follow-ons in Asia in 2008 were both rights issues û the $4.4 billion capital raising by IndonesiaÆs PT Bakrie & Brothers, and State Bank of IndiaÆs $4.2 billion deal. In terms of size, the only deal that was larger last year was China Railway Construction CorpÆs (CRCC) $5.7 billion combined A- and H-share IPO.

In terms of the league table rankings, the top three places were unchanged for most of the year with Citi taking the top spot after being one of the bookrunners for the CRCC IPO in early March. The US bank, which advanced from fifth in 2007, helped arrange $5.3 billion worth of equity deals, which gave it a 9% market share. UBS and Credit Suisse rounded out the top three with $3.85 billion and $3.75 billion worth of league table credits. Goldman Sachs, which topped the ranking in 2007, finished 2008 in eighth place, having helped arrange $3.08 billion worth of deals.
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