KEY TAKEAWAYS: Asia Capital Markets Forum

Author: IFLR Correspondent | Published: 2 Dec 2016
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Opportunities and challenges in high yield

  • 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 are increasing.
  •  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 documentation.
  • 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 investors.

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 overview

  • 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 difficult. 
  • 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 market.
  • 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 model.
  • 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 valuations.
  • 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 voluntarily withdrawing.

RMB-denominated bonds: onshore vs offshore

  • 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 guarantee.
  • 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. 





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