Analysis

Equity: Opportunity in adversity
The impact on leading capital markets law firms of tumultuous A-share and H-share markets has thus far been remarkably light.
ALB China reports

From the record high of 6,000 points last October to lows in the 2,000s, the Shanghai stock index is still continuing its downward trend. In the first eight months of 2008, the number of IPOs in the Greater China region and the total funds raised in the A-share and H-share markets have nose-dived. Many companies have postponed their listing plans amid global economic uncertainty. Law firms across the region, particularly those focusing on capital markets, have been affected to various degrees.
However, there is a philosophy in this dynamic legal services market that as much as adversity brings challenges, it also brings with it opportunities for profit. Leading capital lawyers say their billable hours have not been declining in line with the sagging stock index, and the prospects for prosperity remain plentiful.

Subtle changes in work patterns
Baker & McKenzie and Jiayuan recently helped ensure the A-share and H-share IPOs of China South Locomotive & Rolling Stock Corp were successful. The issuer, China's largest train maker, has raised US$1.5bn through its debut, and its H-share IPO is the third largest in Hong Kong so far this year.
A few large IPO projects have kept the capital markets teams at the two firms quite busy so far this year, but their partners have felt the pinch of the stock market downturn. "If we say we aren't affected, it would be far from the truth," said CY Leung, senior partner of the securities group at Baker & McKenzie in Hong Kong.
"But we are probably less affected than many of our competitors, including some of the best capital markets firms from London and New York." Before the China South Locomotive listing, Baker & McKenzie had also advised on the H-share issuance of China Railway Construction Corporation - the largest listing in Hong Kong so far this year, and the global offering of SJM Holdings, Macau's largest casino operator. "We haven't seen many securities issues this year compared to last year, and although Chinese companies will continue to want to raise funds in Hong Kong, the number of deals in the pipeline is smaller than 18 months ago," said Leung.
The firm's securities group is working on some IPO projects, which are getting closer to completion. If the market conditions do not further deteriorate, partners expect to see one or two more IPO launches at the end of this year. Similar to Baker & McKenzie, Jiayuan was involved in a number of large IPOs earlier this year, including the 'first A then H' share listing of China Railway Group and A-share issuance of Hong Kong-listed China Coal. The firm's managing partner has reported that IPO activity is slower than the same period last year but lawyers are still busy with a range of capital markets-related projects. "While there is a slow-down in the number of IPOs we're advising, we are actively involved in other financing activity, including private placements, seasoned equity offerings and rights offerings," said Yan Yu, managing partner of Jiayuan. "Areas in which we have experienced significant growth this year are M&A and restructuring," Yan added. Her firm is currently advising on Panzhihua Steel's plan to merge with four other companies through share swap, and an M&A deal between Shanghai Automotive Industry Group and Shanghai Bashi Industrial Group.

Staying versatile
"The biggest difference between this year and last year is that there have been less IPOs launched this year, and to be fair we aren't as busy as last year," said Paul Chow, partner with Linklaters in Beijing. "The number of IPOs we've been involved in hasn't changed much this year, but one or two IPOs have been delayed due to market conditions, and that has some impact on our practice."
Usually legal fees will be paid in full once an IPO is actually launched. If a deal is not going to market, the fees will still be paid but may be at a different rate. In spite of a few deals being delayed, Chow is confident that revenue for 2008 will meet or exceed the firm's expectations. "While some IPOs have been delayed, other areas remain busy such as ongoing M&A activity and private, illiquid financings," said Chow. Any firm that wishes to stay in the market for the long term and survive market cycles will need to be versatile. This is a valuable lesson that domestic firms can learn from their international counterparts who have gone through several market ups and downs.
"All practice groups will have different roles to play in different market conditions," said Elsa Chan, head of Baker & McKenzie's securities group in Hong Kong. "Firms who have an extensive range of services will be in a better position than those who don't in a dire situation."

"The number of IPOs we've been involved in hasn't changed much this year, but one or two IPOs have been delayed due to market conditions, and that has some impact on our practice"
Paul Chow, Linklaters

A hopeful future
At the downside of the economic cycle, the outlook for law firms remains positive.
Linklaters recently relocated William Liu, a partner specialising in advising on debt and-equity-linked issues, from Hong Kong to Shanghai. "We see potential in China's capital markets, so we made an investment by relocating Liu," said Chow. "We are very confident in the pipeline of deals - not only the quantity, but also the quality of the deals that the China market will produce. Going forward, deals will become increasingly complex with novel structures."
As many of the large SOEs have already listed, international and domestic firms are now anticipating the IPOs of a large number of substantial private enterprises and companies in the natural resources and consumer sectors. However, it is also expected that IPOs ranging between US$500m and US$1bn will still be plentiful, they say, while mega-IPOs like ICBC will be rare.
"Many companies will still go for Hong Kong listings, because they want the international shareholder base, international standard corporate governance and the cash," said Chow. Chow's optimistic sentiment seems to be shared by the legal fraternity in the region. "The usual wisdom is that if the Shanghai index and Hong Kong index have hit a certain level in the past, then sooner or later they may be able to reclaim that territory. Whether that will happen and how long it will take for them to get back to that level is a trillion-dollar question," said Leung. ALB