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Opinion

Equities: Issuers’ signs of desperation

Banks desperate for business are faced with renewed demands for hard underwriting.

Equity bankers already struggling to push billion dollar IPOs on to reluctant investors in Hong Kong’s stagnating market are being further frustrated by the actions of some wayward issuers and securities firms, who have in recent weeks conspired to return to hard underwriting.

Where a bookrunner agrees in writing to guarantee that an issuer’s deal will succeed by offering to buy any unsold shares itself.

The practice has fallen out of favour because of the market risk it exposes the bank to, but a combination of demanding Chinese issuers, banks eager for any business they can get and volatile market conditions has seen talk of hard underwriting being offered and refused on the rise.

One banker who has seen a number of these situations recently says that the concept of ‘face’ is important to understand in this context: issuers are determined to extract promises from their banks that reaffirm the issuer’s status even when these promises may not make sense for the banks.

Construction company XCMG was said to be among those firms eager to get hard underwriting promises from its banks, with several lenders understood to have offered to cover its deal before examination of the documentation led to questions over the implementation of these promises.

Chinese companies are thirsty for capital as domestic credit conditions tighten, and with the country still growing at a healthy rate of 8.5%, according to official figures, keen to expand their businesses. The relative naivety of many first-time issuers, and the hunger of both domestic and international securities firms to secure their business, are combining to create a situation in which companies are trying to force shares on a market that doesn’t want to buy them.

There is already a more established method for nervy issuers to ensure some degree of success for their deals, with the increasing prominence of cornerstone and anchor investors in Asian equity transactions showing the way.

In both cases it is qualified investors taking the market risk, rather than the banks. While the practice is common when selling convertible bond deals, bankers say these transactions are less public, so that it is less apparent that a bank has ended up with the deal on its books, and convertibles are easier to hedge. Banks stuck with large blocks of shares that they were unable to sell are in a difficult situation, especially when capital is tight.

With Chinese companies lining up to sell billions more dollars worth of shares on Asian exchanges despite global market conditions, the banks running these deals are going to have to take a more coordinated, tougher line with issuers for the sake of all involved.

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