Opportunities and challenges in high
- Market volumes have gone up by 50% and returns across the
asset class are in high single digits.
- In the early parts of the year, there were significant
concerns, particularly in the commodity markets, with many
quality players suffering and there was a negative sentiment
in the market.
- This market rebounded quickly and was testament to the
ongoing deepening of the Asian high-yield market.
Over the summer, the region saw
stabilisation in the commodity market, leading to some
10-year deals unseen for several years in countries such as
Indonesia and India.
- As the region is transitioning to a tighter interest-rate
environment, US dollar funding costs for banks in the region
- Capital for many banks has been an issue with Basel
IV and also IFRS 9 (International Financial Reporting
Standards), making the carrying costs for a lot of high yield
and stressed loans and bonds increase markedly.
Distressed debt in Asia: top issues in enforcement
and trustee roles
- Bond structures and trustee structures don’t
work in Asia as they are a creature of common law.
- Judges don’t recognise concepts of trust and
you have to show a direct payment relationship between the
lender and the borrower.
- There is a real problem in cases of a covenant default
and when there is a real divergence of opinions among
bondholders of what they want to do.
- Many issuers, particularly in Indonesia, propose a
restructuring plan which will then be voted on by
bondholders. The issuers will then amend it and they will
vote on it again.
Regional equity capital market updates –
Hong Kong, China and beyond
- Hong Kong is considered an expensive place to list with a
pricey IPO process. Legal fees are very high with multiple
third parties involved and a tremendous amount of
- Some of the sponsor regulations over the last decade,
while well-intentioned, have seen the documentation and the
relevant processes become highly voluminous.
- There is a focus on suitability because of intense
focus on retail participation, but with the focus on retail
suitability has come a lack of flexibility.
- While innovation is given to the structuring, pricing and
allocation of deals, Hong Kong remains stuck in the T+5
settlement (Trade date plus five days), making investors feel
like they have to de-risk their deals.
- Recent IPO deals in Hong Kong have been very
cornerstone-dominated, with 50% to close to 80% of shares
prescribed by PRC investment banks.
- In terms of investors’ participation, Hong
Kong has focused too much on attracting overseas issuers, but
with some of the deals being cornerstone-heavy, there is a
need for the regulators to start thinking about whether or
not the deals are still attractive to international
What is the international and regional outlook for
capital markets in 2017?
- A greater deal of regulatory uncertainty is bound to
remain in the short term, with questions over how the UK will
bargain for its EU exit still dominating.
- The UK is still hoping that, by compiling most of
the infrastructure building in Mifid II (The Markets in
Financial Instruments Directive), that they
will gain equivalency with the EU.
- Deregulation is one of the areas that president-elect
Trump is giving some market participants hope, including in
the area of healthcare, with plans to deconstruct Obamacare
and to eliminate a lot of regulations in that area.
- Technology has done very well over much of 2016 and a
number of Asian-based healthcare companies are considering
doing something in the US.
- This year has been historically bad for the US equity
market, with the number of IPOs raised having seen a 50%
decrease, but we see activity in the technology sector and
the healthcare sector.
- Compliance issues will continue to include
anti-corruption, which have some global implications, because
there are certain jurisdictions that are relatively behind.
Accessing the Chinese capital markets: an
- It has been difficult to obtain official approval for
Chinese listings. In the past few months, a lot of private
equity practitioners have not been able to find established
channels to coopt because the official channels are so
- The Shenzhen Stock Exchange currently has 8000 listed
companies, with a market cap of $3.3 trillion, accounting 46%
of the A-share market. The trading volume of the Shenzhen
market in the first nine months of this year stood at $9
trillion, accounting for 62% of the A-share market and over
60% of equity-fundraising comes from the Shenzhen
- The Shenzhen-Hong Kong Connect doesn’t have
an IPO function in that investors can only buy from the
secondary market. In the short and medium-term, you will see
the valuations between A-share and H-share converge, but in
the long term it will be a dual-listing, dual-trading
- The continued depreciation of the renminbi and the
outflow of capital have caused the closure of a lot of
channels that the Chinese government has put in place.
- To prevent market volatility, China should introduce more
international institutional investors because the domestic
investor base is largely made up of retail investors who have
pushed up P.E ratios so high, even above the secondary market
- The long-processing time for IPO review in China is due
to many reasons, including the long queue and the China
Securities Regulatory Commission tried to discourage
applicants from listing, with 7 to 800 listing applicants
RMB-denominated bonds: onshore vs
- Even though the China Interbank Bond Market has opened
up, there isn’t a rush from foreign investors to
make a registration and to start buying a significant amount
of onshore bonds.
- The onshore market consists of more than 60% commercial
banks that are buying bonds. Offshore foreign investors are
not used to this; they are seeking liquid instruments that
they can trade, and there
is very limited trading outside of the central
government/policy bank bonds.
- US dollar-denominated issuance volumes coming out of Asia
are dominated by PRC issuers. Close to 55% of new issues have
come out from the PRC, 12% from Korea and Hong Kong. North
Asia itself accounts about 80% of the USD issuances and a
bulk of that is PRC issuance.
- The market has matured so much in terms of accepting
keepwells that in many ways, people aren’t
necessarily distinguishing the two and people are viewing
keepwells as almost as good as, or equivalent to, a
- The onshore bond market is not that mature and market
participants often assume some implicit guarantee from the
government, but that has been changing in that there have
been more than 50 defaults.
The increase in KYC for financial institutions
– what is required?
- The current KYC (Know-your-customer) practice is very
complex and expensive and inconvenient. There are no industry
guidelines on what documents are needed to be collected to
satisfy the relevant regulatory requirements.
- Financial institutions face a dilemma in that the
regulators have been emphasising the importance of KYC, and
been imposing anti-money laundering (AML) and anti-tax
evasion rules on the banks but there are no detailed industry
standards recognised by the regulators.
- There are two concerns: one is data privacy and
confidentiality such as how we ensure our
client’s data remain confidential and this has
become more acute because of the cybersecurity risks.
- Chinese banks have started to be subjected to heavy fines
by US authorities for AML and KYC failure. A recent example
is the New York branch of the Agricultural Bank of China was
fined $215 million for AML failure.