INDIA: Real estate sector to build on healthy 2006
Indian capital markets have continued to go from strength to strength in early 2007, following a bumper year in 2006 that saw a record volume of IPOs notched up, close to double the volume of 2005 and larger than the biggest year by volume recorded in 2004.
Predictions are for a similar - if not better - performance in 2007.
"In the first quarter there is a huge IPO line-up," said AZB & Partners capital markets practice head Bahram Vakil. "We have already had the first few, and there is a long queue, so if the markets hold it will be close to a record quarter," Vakil says.
Delhi-based Prime Database predicts 150 companies will list this year and raise an estimated US$10bn, with more than 30 companies having already filed or received approval from the Securities and Exchange Board of India (SEBI) to raise US$6.3bn.
"With GDP growth at over 9%, companies need capital and are taking this window of opportunity. IPOs are coming from all different sectors," Vakil says. This is obvious where capital is most needed, such as farming, construction, manufacturing and IT.
However, real estate has been the biggest capital market growth story, on the back of changes to legislation allowing a flood of foreign investment into the sector.
This year will likely see the listing of DLF property group, one of the most anticipated listings of 2006 until it postponed for a number of reasons. Vakil, who is leading the team acting for DLF on its proposed listing, said the company has filed and it is likely this would come to fruition in the first quarter of 2007. It will fall into the top tier of past India listings in terms of size when it finally comes to market.
The thirst for capital in the real estate sector has also led to growth in the popularity of listings on London's Alternative Investment Market (AIM) exchange, with many companies flagging their intention to list in the UK. The rush of Indian companies follows a total of 11 Indian listings on AIM in 2006, which raised almost US$2bn. However, the investor appetite for these companies has abated somewhat, due to their high risk and at times intangible plans for investment of new funds.
On the debt side, the convertible bond market is again picking up, after a dip last year when the capital markets faltered. Issuing in various jurisdictions such as Luxembourg and Singapore, companies listing will likely in future be larger companies with more of a track record than the smaller, newer companies which have made frequent past issuances.
As a result of the capital market boom, the handful of firms who are most active in the market have no shortage of work to keep them busy. "We have been very lucky - we have had as much work as we can handle," says Vakil. "There's a lot of work coming through the door, and there doesn't seem to be that many law firms that have entered this space, which is suprising to me," he says. The key firms likely to stay active this year along with AZB & Partners are Amarchand Mangaldas & Suresh A Shroff & Co, and Rajani & Associates, with these three firms doing in the vicinity of 40 deals each last year. J Sagar & Associates and Khaitan & Co are also key players. Among these firms, IPO advice has become relatively commodotised, with charge-out rates being generally known and in the same vicinity.
CHINA AND HONG KONG: Smaller IPO deals follow mammoth 2006
At the end of 2006, it was Industrial and Commercial Bank of China's US$21.9bn listing that caught headlines globally as it surpassed NTT Mobile's US$18.1bn IPO of 1998 to become the largest IPO of all time. Having followed Bank of China's US$11.2bn listing earlier in the year, it was a year difficult to match for Asian equity markets.
The big Chinese bank listings pushed Asian equity markets activity to an alltime high in 2006, with US$140.5bn in proceeds, a 65% increase on 2005 despite a drop in the number of deals from 788 to 732. Chinese issuers were most active, capturing 54.9% of the total market and accounting for US$69.1bn of fund raising from a total of 164 issues.
Though 2006 was the year of mega deals, most pundits expect 2007 will see a steady flow of sizeable and quality listings of significant total volume coming out of China.
"Assuming the markets hold up, it will be just as busy this year as it was last year," Davis Polk & Wardwell capital markets partner Bill Barron says. "One of the big differences will be the deals will be smaller - there are not a lot of ICBCs, Bank of Chinas or CCBs left in the pipeline. pipeline.Whereas those were colossal deals in 2006, a billion-dollar IPO or a two-billion dollar IPO will be relatively large for 2007," Barron says.
Freshfields' Teresa Ko agrees. "The IPO market will continue to be very active. There's already a strong pipeline of deals coming out in the first half, both stateowned and privately owned, but increasingly more privately owned. The result is that the deal size will be much smaller than what you had seen last year," she says. Last year was a phenomenal year for Freshfields, which advised on both the BOC listing and the ICBC dual listing in Hong Kong and Shanghai, the first of its kind. Ko says she expects this dual listing structure to become a "well-trodden" feature of upcoming bigger deals.
The firm, which proved to be in a league of its own in 2006, also advised on the offerings of Shui On Property (US$876m), China Communications Construction (US$2.4bn), China Coal Group (US$2bn) and Shimao Property (US$549m) amongst others, putting its market share, by volume of funds raised, at 88%.
Assurance partner of Pricewaterhouse Coopers Richard Sun says financial institutions, real estate, retail and consumer goods related companies will be the key contributors to capital raised in 2007 on the Hong Kong Stock Exchange. Law firms are expecting Chinese second-tier banks and insurance companies to play a big part in listings this year.
However, Jones Day partner David Neuville has voiced fears that although the capital markets continue to hold high expectations for 2007, most believe it is only a matter of time until there is some type of correction in Asian markets.
Neuville's comments came only two weeks prior to a 9% tumble in China Mainland A-share stock caused by rumours of the introduction of a possible capital gains tax, which sent exchanges around the world into a dive. It has since caused a stock slump, which, combined with fears about the state of the US economy and a possible market bubble, has driven the Hang Seng Index down 9% in two weeks (at the time ALB went to press).
REGION: High yield debt makes a comeback
The resurgence of high yield debt in Asia over the past year has been a part of an increased debt market for law firms, though it has been outshone by equity.
"There was a period in Asia from the late 90s until 2004 when there really was not any high yield debt, and there has been a marked increase in the last two years," Barron says.
The lack of high yield offerings prior to 2004 was a result of what Barron calls "a hangover effect" from the Asian financial crisis and the pain companies had gone through.
"The other thing that has happened is that a lot of the Chinese companies have become interested in doing high yield debt offerings - before there weren't many," he says.
Teresa Ko says Freshfields completed just such an offering - a high yield bond offering (US$600m) for Shimao Properties soon after its successful IPO. China's largest corporate bond deal in 10 years and the largest ever for a private Chinese company, it followed a string of high yield offerings for
PR-based property companies, including Greentown and Agile Property which managed to raise $US400m.
These high yield offerings are usually issued by offshore holding companies (usually in the Cayman Islands) of these Chinese assets, which have frequently been in real estate.
The growth in Asian high yield is part of a global trend, with 2006 the biggest year on record in terms of proceeds, topping the previous record in 2004 by 11.7%. Furthermore, 2006 issuance represented a 55.4% increase compared to issuance in 2005.
But a new trend could eclipse the growth of high yield for legal practitioners. Barron predicts 2007 will see a lot more leveraged loans, which heated up in 2006 and will likely continue in 2007, as well as more mezzanine financing from hedge funds.
"Most of the investment banks now have the capacity to make loans, and they are often loans into companies being bought out by private equity firms or loans being made to a company so they have the money before they do an acquisition or before they do a bond offering. Quite often they are loans that will be taken out by a high yield debt offering.
"That is a big new area of interest for the banks out here and for law firms, and it may be the market is more active this year than the high yield debt market," Barron says. Such products usually require law firms to draft a highly structured loan agreement, as the high-risk nature requires the likes of allocating collateral.
The increased activity of hedge funds in the region will also drive changes in capital markets, as they provide financing at various levels, including senior and mezzanine financing, and will buy equity or convertible bonds.
Barron says Davis Polk worked on a deal where a conglomerate of hedge funds provided the financing, in the form of subordinated loans and warrants, for the management buyout of HKSE-listed Asia Aluminium for US$454m at the beginning of 2006. ALB