Lion Air’s aborted IPO has deeper ramifications for capital markets

The delay to Indonesia’s budget carrier’s listing should have investment bankers very worried: the coronavirus now no longer fits the China-only profile but has infected those merely with exposure to it.

Lion Air, Southeast Asia’s second largest low-cost airlines (LCCs), finally joined the increasing list of companies choosing to delay or cancel capital raising activities this year on account of the novel coronavirus. To name two more, Chinese biotech InnoCare, which develops treatments for autoimmune diseases, has delayed investor meetings in Hong Kong, and Japanese restaurant operator Daikiya Group Holdings postponed their plans to go public.

Over the past fifteen years, Lion Air has made several previous attempts to list, only to pull the decision on account of a less favorable macroeconomic or operational environment. In its most recent attempt, it had planned to raise up to $1 billion; the airline is keen to curry investor favour after a fatal Boeing 737 Max crash in 2018 and a passenger data breach the following year had dented its reputation.

Before the coronavirus outbreak, conditions looked ripe for the company to raise money in the first quarter of 2020. Within Asia, reduced capacity had improved flight yields which bode well for profitability. Earnings at Lion Air’s full-service competitor, Garuda Indonesia, are expected to be in the black for 2019 following two previous years of losing money.

No Longer ‘China Only’

Without investment bankers planning or asset managers attending roadshows in a bid to curb the virus outbreak, postponing a listing makes sense.  However, Lion Air’s delay underscores something more sinister for the capital markets:  the coronavirus no longer affects just Chinese companies.

Given Lion Air had to cancel more than 50 China flights to 15 cities only proves now is not the ideal time to ask investors for money when a crucial part of its sales pitch is grounded. Overseas spending by Chinese tourists is estimated to be worth between $130 billion to $280 billion, supported by 150 million Chinese traveling overseas, according to the China Tourism Academy.

For first two months of the year, market activity remained pronounced outside of China, particularly in Asean.  

In January Singapore CapitaLand Commercial Trust and CapitaLand Mall Trust proposed a merger deal worth $6 billion. In February Central Retail raised $2.5 billion in Thailand’s largest listing since 2013 when BTS Rail Mass Transit Growth Infrastructure Fund raised more than $2 billion. Among smaller but notable deals include Elite Commercial REIT, a trust with UK based assets, raised $150 million as the United Kingdom withdrew from the European Union.

A Lion Air IPO delay changes this narrative, particularly as more Asian companies with Chinese revenue or operational components assess the coronavirus extent to their business. Given China’s integration into the global supply chain, few are isolated from the coronavirus that originated in Wuhan.

Lion Air is not alone. Apple offered a cautious production outlook as production gradually resumes, pushing back the release of its affordable iPhone. Car manufactures like Nissan and Hyundai have closed factories outside of China as assembly parts were unavailable for export. 

For airline operators witnessing demand slump due to a pullback in travel, waiting is particularly costly since the business model is driven by front loaded debt purchases and incorporate balance sheet risks.

Consequences are beginning to surface. Chinese conglomerate HNA Group, which owns 14 airline operators and faced cashflow shortages before the virus outbreak, is reportedly in talks to sell its business to the Hainan government. Preliminary discussion surrounds the government selling HNA’s airline assets to China’s three largest carriers, Air China, China Southern Airlines, and China Eastern Airlines, according to Bloomberg.

What this means for the airline industry is difficult to predict, but its safe to presume competition will get nasty, as “affected airlines with moderate exposure to China and APAC are likely to be able to re-deploy capacity… increasing competition on those routes and reduce airfares,” according to a note by Fitch Ratings.

Deal forecast for Indonesia

While Lion Air finds itself between unfortunate market and industry conditions, the local environment is less hostile, which could benefit deal flows later in the year. The Indonesia rupiah has stabilised, appreciating 10% against the US dollar since 2018 while yields are while government bond yields are at their lowest points in two years.

Back in December, Indonesia Stock Exchange president director Inarno Djajadi said that the bourses set a target for 78 companies coming to raise funds in 2020. Given the timing of the coronavirus outbreak, deals could still come to market closer to the end of the year.

Indonesia’s proposed omnibus bill is also expected to act as a pull factor, drawing more foreign capital as the country aims to improve the ease of doing business.

Though not finalised, Lion Air is looking to raise between $500 million to $1 billion, according to Reuters. At the end high end, this would be Indonesia’s third largest deal, and the low end matches the proceeds Garuda Indonesia raised in 2016.

BNP Paribas and Morgan Stanley are the international banks leading the deal. Both banks and Lion Air did not respond when reached for comment.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media