Corporate Financing Analysis - Bullish Sentiment Building Behind APAC ECM Activity - 15 MAY 2017


Asia Pacific (APAC), excluding Japan, equity capital market (ecm) activity is still struggling to find consistent momentum in 2017 but in our view the month of April proved to be one of qualitative significance for such activity in the region due to the success of three key deals. More specifically, we are referring to the bringing to an end of the APAC region's equity-linked dry spell, the largest rights issue of 2017 to-date and the biggest regional float of the y-t-d period (the second largest globally).

South Korea In The Engine Room
Top 5 APAC ECM Deals Of April 2017 By Deal Value, USDbn
Source: Dealogic , BMI

The Blueprint: Euro-Denominated Convertible Bonds

April saw Chinese infrastructure firm Zhejiang Expressway end the more than two-year APAC drought in convertible bond issuance. Convertibles have never really taken off in Asia but that could soon be changing due to a recent regulatory change that should pave the way for further convertible bond deals to be made. New National Development and Reform Commission (NDRC) debt issuance measures unveiled in Q315 saw a simplification of the approval process for offshore note sales. Under the new guidelines, issuers are required to file applications first and will await approval from the NDRC, which stipulates a response within five days. This could well see the offshore resort of Hong Kong benefit from mainland firms wishing to issue convertibles. If the high level of interest in the Zhejiang Expressway deal is anything to go by, then we may see plenty more firms moving to follow suit. The firm's EUR365mn H-share deal was met with overwhelming demand for what represented the region's first euro-denominated convertible deal - a switch in currency to move away from the original plan to issue in US dollars owing to the lower funding costs provided by the former. In fact, the last firm in the APAC region to sell a euro-denominated convertible deal was Australia's Cromwell Property Group as far back as in January 2015.

Downer EDI Makes The ' Cash Call '

Rights offerings gained a real foothold in Asia last year ( see ' Cash Calls ' Take Centre Stage In Asia ' , March 23 2016) and the positive momentum towards such deals appears to have continued into 2017 with Australian engineering and infrastructure management services provider Downer EDI issuing the largest 'cash call' of the y-t-d period in the APAC region on April 19. The Sydney-based firm completed the retail component of the accelerated entitlement offer to raise proceeds of AUD1.00bn (USD773m) that will reportedly go towards the proposed USD1.26bn acquisition of cleaning and catering firm Spotless Group. We note that Downer's offer represents a 59% premium to Spotless's closing price on May 5. It seems that issuers of cash calls have some way to go before they are able to convince investors of their merit, however. Indeed, Downer's cash call was not well received by existing shareholders despite the 20% discount on offer. The result was that the firm only received interest in just over 50% of the subscription, leaving the shortfall to the underwriters.

South Korea Driving APAC IPO Activity

South Korea has stepped up to the plate in the market for first time share sales in the APAC region this year, with the two largest floats of April 2017 both originating from the country. The largest of the two deals saw Netmarble Games Corporation tap ecm investors for USD2.3bn on April 21. The deal came across the finishing line as the second largest float globally behind Silicon Valley unicorn Snap, which raised USD3.4bn in the US market ( see ' Snap IPO A Potential Boon For US Tech Sector Floats ' , November 23 2017). The float was also the largest to complete in South Korea since the USD3.5bn public market listing of Samsung Life Insurance way back in April 2010. The South Korean ecm arena also played host to ING Life Insurance Korea's USD974mn float, completed just three days later on April 24, a deal that was helped across the finishing line by a group of bookrunners that included Samsung Securities, MS, GS, Mirae Asset Daewoo and KB Financial Group. We note that such deals add further support to our view that the South Korean IPO arena will be the one to watch across the course of this year ( see ' South Korean EC Enjoying A Bull Run ' , March 16 2016), with Dealogic data showing that the country has already played host to as many as 23 listings worth a combined USD3.7bn. In comparison to the same stage last year, 16 South Korean firms had gone public to collectively raise just USD569mn. This view is supported by a favourable macroeconomic and equities backdrop in the country that is, in our view, set to continue outperforming a growing number of nations around the world going forward. Such conditions have paved the way for local stocks to enter a bull market; the KOSPI (Korea Composite Stock Price Index) is up by 12.56% in the y-t-d period and by 17.27% since twelve months before, as Bloomberg data correct to May 9 show.