ASIA MARKETS – HALFTIME REPORT
It’s a beautiful summer here in Hong Kong, with the monsoons (winds) blowing all of the nasty pollution away from city’s skies and upward into southern China. This weather pattern generally means that Hong Kong summer skies will often be a clear robin’s egg blue, even if the heat and humidity make outdoor activity, such as hiking, a rather steamy adventure. Fortunately, many of Hong Kong’s great hikes, such as the hike to Sai Wan beach in the New Territories, end at some body of water where you can cool off in a clean, clear sea under a blue sky.
INVESTMENT GRADE DEBT
The main pockets of debt capital markets activity involve investment-grade debt offerings. These are not your high-yield (read: high-risk) offerings of 2007-2008 with 10%+ yields. In these uncertain times, investors are seeking to find the optimum point between yield and safety. They want to invest in debt securities which will offer more yield than, say, a treasury bond, but they want to minimize some degree of risk.
What this means for Asia debt capital markets is that many of the bond deals which are going through right now involve issuers with a heavy degree of state ownership, or some other factor which makes them a less risky investment. One lawyer at a top US firm here in Asia mentioned to me that bond issuers are scrambling to find any tie to, say, state ownership to increase the perceived safety of the investment in their securities. While the sovereign relationship tie with some issuers is as obvious as a ‘Luke, I Am Your Father’,with other issuers it’s more of an ‘I am your father’s brother’s nephew’s cousin’s former roommate’. Which should make the relationship to a sovereign entity absolutely nothing, yet into the prospectus it goes!
SOUTHEAST ASIA AND OTHER DEVELOPING ECONOMIES
Southeast Asia, heralded earlier in July as the ‘engine for economic growth in the world’ by British Foreign Office Minister Jeremy Browne, is a bright spot in a world of economic uncertainty. Hillary Clinton’s trip to Asia earlier in the month was just as focused on economic issues as it was on security concerns, if not more so, as she promoted US investment in Southeast Asia. And it is Malaysia – not Hong Kong or Singapore – who is in position to take the crown of Asia’s top IPO market in 2012. Robust domestic demand, coupled with a steady stream of investment, is helping to keep the regional 2012 GDP growth forecast of ASEAN economies at a modest, but resilient 5%.
Deals out of the Philippines, Indonesia, Malaysia, Thailand, and even Sri Lanka and Mongolia have been buoying the Asia markets in 2012. Associates that I have placed in US capital markets practices and other practice groups in Singapore (or in Southeast Asia practices in HK) report being very busy, while some of their counterparts at firms which focus primarily on Hong Kong IPOs are reporting very little dealflow.
Southeast Asia also provides a strong pipeline of project finance, resources, and energy-related transactions. Associates in project finance or energy-related fields are extremely busy, with many of their deals out of Indonesia. A number of US law firms have their eye on opening an office in Singapore in order to take advantage of the project finance and energy/resources work flowing out of Southeast Asia, and this deal flow does not show signs of stopping.
DARK SPOTS ON THE HORIZON
It’s not all sunny days, especially as Hong Kong IPOs are concerned. From 2009 to 2011 Hong Kong led the world’s financial centers in terms of amounts raised from IPOs. The Fragrant Harbour has not fared nearly as well in the first half of 2012. According to Dealogic, amounts raised from new listings in Hong Kong this year (as of the end of June) have totaled a touch over $3 billion, down from $35.4 billion for the whole of 2011 and a whopping $67.8 billion in 2010. The Financial Times reports that Nasdaq, the NYSE, and the Shanghai stock exchange are leading the pack so far in 2012, with Hong Kong far down the leaderboard in seventh place.
Graff Diamonds pulled their billion-dollar Hong Kong IPO at the end of May, resulting in an absolute cessation of work according to conversations I had with several capital markets associates involved in the behemoth transaction. Manchester United also snubbed the Hong Kong Stock Exchange in favor of the NYSE for their IPO earlier in July. Graff and Manchester United were not the only potential issuers to yank a planned Hong Kong IPO – China Nonferrous Mining Corp, a copper producer, and China Yongda Automobiles Services, an automobile dealer, also shelved deals in May of this year. HK IPOs that are managing to close, such as Yitai Coal, the second biggest HK IPO this year to date, are being downsized and priced at the bottom of the indicative range, with uneasy markets resulting in low participation by skittish retail investors.
It’s not all bad news. There seem to be a number of strong Hong Kong offerings in the pipeline, including the planned listings of Russian oil major Lukoil and behemoth Mongolian state-owned mine Tavan Tolgoi (the latter more likely in 1Q-2Q 2013). And some associates report a hurry-up-and-wait sentiment among initial purchasers, meaning that client underwriters view it as more cost-effective to have the IPO ready to go while waiting for the right moment to pull the trigger, than to have their lawyers undertake a last-minute scramble to finalize the deal documentation when the investment climate becomes more favorable. So some associates are managing to bill a fair number of hours despite the lack of deals actually closing.
But are there layoffs? Rumors of ‘stealth layoffs’ have been circulating throughout capital markets departments of various law firms, but there is nothing to indicate that anything close to the carnage of March 2009 will occur, and some law firms are still hiring mode – even for capital markets associates. In fact, we recently placed 2 US cap markets associates in HK, in the past month. Law firms are still bullish on China M&A, with several seeking lateral partners who can provide them with entry into that potential market as well as other law firms actively hiring M&A associates.
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