Asia’s bankers stay busy in a meltdown

Although more than one banker mournfully declares that "the capital markets are closed" during interviews for this story, there is still plenty of work to be done. "There’s a tremendous amount of dialogue with our clients at the moment," says a senior investment banker in Hong Kong, when asked how his bankers are keeping busy during these lean times for primary market deals.

He adds: "The issue of hedging is also going to be getting a lot of headlines. CFOs are not going to pull the trigger yet on hedging but companies are going to get much more disciplined on that front and really look at how they can improve their risk management. That’s something that we can obviously help them with."

Chief executive Owen Thomas concedes that jobs will be lost at Morgan Stanley Asia, most notably in those lines of business such as principal investment that require risking the firm’s own balance sheet. His firm is also in discussions with MUFG, the Japanese bank that invested $9 billion in Morgan Stanley in October, about how they might cooperate more closely in Asia. Bankers at rival firms in Tokyo speculate that a joint venture along the lines of Citi’s Nikko Citi brand might emerge but Thomas won’t confirm any definite plans yet. "It’s at too preliminary a stage for me to talk specifics," he says. "But we are having ongoing discussions with them at a very senior level about how we might work more closely together."

Thomas notes that M&A activity has not suffered as badly as capital-raising during the slowdown, and although Dealogic’s figures do show some reduction in overall merger volumes during the third and fourth quarters of this year he is correct: there are still plenty of deals taking place.

Many of these involve cash-rich companies in Japan and China – firms traditionally described as conservative or prudent (euphemisms for boring in boom times) from these two countries have spare cash, ambitions to expand overseas and a target-rich environment of undervalued peers.

Rising suns

Japanese outbound M&A has been particularly busy: figures from Dealogic show a total deal flow of $71.5 billion from 308 deals so far this year, more than triple the $23.5 billion-worth of outbound deals announced in full-year 2007. Much of that comes from the megabanks’ investments in western financial institutions but healthcare has also been particularly active, with more than $17 billion-worth of deals.

There has also been plenty of work for investment banks in Japan helping their peers raise capital with preferred shares: issues of preferred share debt are at $11.5 billion this year from 10 deals, up 69% from last year and accounting for 78% of all such shares issued in the Asia Pacific region in 2008. Although the Japanese megabanks tend to use their own securities subsidiaries as bookrunners on these capital-raising deals, there has been work for JPMorgan, UBS, Goldman Sachs, Morgan Stanley and Merrill Lynch on deals for SMFG this year.

China goes hunting

Many Chinese companies that hoarded cash during the country’s recent accelerated growth are, like their Japanese peers, now in a position to go hunting. A typical example is state-owned Yanzhou Coal, which announced on October 24 that it would buy 74% of Hua Ju Energy for HK$673 million ($86.8 million) to create an integrated coal and power operation. HSBC was sole adviser to Yanzhou Coal on its acquisition, and Bob Yang, head of China in the firm’s global banking unit, explains the rationale behind the deal. "[Yanzhou Coal] is a very conservative company," he says, "that has managed its business very prudently in recent years when coal prices were high. This allowed them to build up an acquisition war chest, which they are now in the enviable position of being able to put to work."