China’s Black Monday could crimp dealmaking

New bond and stock issuance could be among the casualties after shares in Shanghai suffered their worst daily decline in eight years.
Some Chinese companies could struggle to raise funds in the wake of Monday’s market riots, analysts and bankers said, after a regional selloff gathered pace as market fears over China’s gloomy economic outlook continued to build.
A weekend pledge by China's state pension fund to pump more money into flagging mainland bourses failed to have the desired mollifying effect as investor selling intensified, sending key benchmarks to fresh multi-year lows. The Shanghai Composite index sank 8.5% on Monday, its biggest percentage one-day drop since February 2007.
"Today's sharp correction is only the latest indication that all is not well with China's economy," said Philippe Espinasse, a former equity capital markets banker and author of IPO: A Global Guide.
In Hong Kong, the Hang Seng index tumbled 5.2% to its lowest level in two years, adding to the unhelpful backdrop for any initial public offerings in the works. 
“Selling a China-based IPO at [a] high valuation is going to be very difficult as the fog of the happy investor dream looks more like a slow-growth developed-market play,” Keith Pogson, a senior partner at accounting firm EY, told FinanceAsia.
His pessimism was echoed by one equity capital markets banker FinanceAsia spoke to, who said current market conditions made it difficult to launch new deals because market sentiment directly impinged on an IPO's valuation and size.
In the six weeks to August 19, foreign investors sold $14.5 billion of Chinese shares, making it the most heavily sold market in the Asia-Pacific region after the Philippines and Taiwan, according to Jefferies.
On hold
China’s IPO markets are virtually on hold after Chinese authorities stepped in to try to relieve some of the pressure off markets. With the Shanghai and Shenzhen Composite indexes now down 37% and 39%, respectively, from their June 12 peaks, there is little sign of them reopening soon.
Hong Kong-traded shares of Huatai Securities and GF Securities – the city’s biggest IPOs so far this year – have now also fallen 49% and 41% below their offer price, which may put pressure on upcoming candidates including China International Capital Corporation and China Huarong Asset Management later this year.
Given the weakness of equity markets, bonds could represent an alternative since they tend to be dominated more by professional and institutional investors and are hence less volatile. China’s stock markets, in contrast, are largely a retail-heavy affair.
“We will see some running to the bond markets to both escape volatilities in stock markets and try to find a safe haven,” said Pogson “Investors are generally looking for shorter tenors given the threat of rising interest rates.”
But even here, some Chinese companies could face hurdles.
“I’ll be surprised if the syndicates will rush their clients out now with the broader sentiment much weaker globally,” Ken Lee, Managing Partner at Ark One, a Hong Kong-based credit fund, said.
Lee, a former Asia-Pacific head of debt syndicate with Barclays, said the primary bond market is typically busy in early September after the summer lull but he is now cautious of any deal launch.
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