Investors and banks turn their attention to block trades

It has been a tough year so far for Asian IPOs, even if the pricing last week of IHH Healthcare’s $2 billion offering did improve the data somewhat. A large number of deals have been pulled or postponed and, aside from the largest new listings (Haitong Securities in Hong Kong, Felda Global Ventures in Malaysia and IHH in Malaysia and Singapore), many of the deals that have crossed the line have been bought primarily by corporate and strategic investors. Financial institutions are not really participating, and if they do it is in small sizes.

The uncertainty about what will happen to the eurozone and signs of slowdowns in other key markets such as China have made financial markets volatile and highly news-driven, and in combination with the long lead time from IPOs in Asia, investors simply view the risk of committing money to market newcomers as being too great.

But many financial institutions do have money to invest and instead they have turned their attention to overnight block trades. Referring both to sell-downs by existing shareholders and follow-on share sales by listed companies, blocks are less risky as they are completed in just a few hours while the market is closed and typically also come at a decent discount versus the market price.

Investors are currently treating blocks as a way to gain quick access to the market at a meaningful size — and at a discount — and bankers say they are getting reverse inquiries from investors on big, liquid stocks.

Banks too are keen to do these trades as they can more easily be timed to coincide with brief windows of positive share price movements. And although banks will often put their own money on the line when doing blocks, such trades can bring in decent fees if they are priced correctly because they often have only one or two bookrunners.

On IPOs, fees are higher but often have to be split between five or more bookrunners. Many bankers note, though, that they prefer to originate their own blocks as opposed to fight for the deals that are bid out by sellers or issuers, since the latter tend to command tighter discounts, and hence lower fees.

After a spurt of activity during the past three weeks, the volume of accelerated offerings in Asia ex-Japan (basically overnight block trades and follow-ons) has risen to $26.7 billion, according to Dealogic, which represents the highest year-to-date level on record. By this time last year, there had been $17.7 billion worth of accelerated offerings.

To put it in a bit of perspective, blocks account for 49% of the overall equity capital markets volume in Asia outside Japan (and excluding A-shares, since it isn’t possible to do an overnight block trade in China). And six of the top-10 ECM deals so far this year have been blocks, including AIG’s $6 billion sell-down in AIA Group, Goldman Sach’s $2.5 billion sell-down in Industrial and Commercial Bank of China and Citi’s exit from HDFC Bank in India.

Bankers are hopeful that this activity will continue during the next couple of months as the IPO market heads into the usual summer quiet period. However, it is not a given. While investors are interested in buying blocks, they are focused primarily on high-quality names with solid track records. They are also price sensitive and in many cases there is still a gap between what the seller wants and what investors are willing to accept.

Companies in particular aren’t that keen to sell if they view their share price to be undervalued, as it will net less cash and result in a lot of dilution. So, sell-downs by existing shareholders, especially financial sponsors that need to monetise some of their investments to return cash to their own investors and banks that need to reduce their risk-weighted assets to comply with new capital requirements, are expected to dominate. But they too typically don’t want to sell at a loss. And while many stocks are still displaying gains during the past one or two years, in some countries those are being offset by a depreciation in the local currency. India and Indonesia are two prime examples.

So, a key job for the region’s bankers during the next few months — aside from making sure the IPOs in the pipeline are ready to go when the markets improve or stabilise — will be to try to bridge that valuation gap between issuers and investors. If they can do that, we could continue to see a reasonably active ECM market in the months ahead, even if the appetite for IPOs remains at a low.