Is the Party Over?

Some of the exuberance is winding down, but Asia's investment bankers are still working on a long queue of IPO, M&A, and other financing deals.

When India’s ICICI bank issued a US$750 million five-year bond in
January of this year, it achieved a pricing of
174.8 basis points higher than similarly dated U.S. Treasuries.
Not too shabby in an environment of abundant and cheap credit.
Fast forward eight months. In September, ICICI again tapped
the global debt markets with another five-year fixed rate note.
This time, however, it had to accept an interest rate that was a
whopping 237.5 basis points above U.S. Treasuries.

And this was during a relatively calm period after the first ructions
in July over the sub-prime crisis in the United States, which
had caused credit markets to seize up. Had ICICI held out for a
better pricing, it might now be unable to raise capital at all. In
November, Chinese property developer Country Garden pulled
a US$1 billion global bond issue because virtually no investor in
America was buying.

So is the party over in Asia? It looks like it for offshore debt
financing and private-equity fueled leveraged buyouts, at least in
the short term. A bank typically holds capital equivalent to 10 percent
of its loan book, meaning that a dollar of capital can potentially
translate into ten dollars in loans. When bank capital is
reduced because of provisions for losses arising from the subprime
crisis, the bank’s ability to lend is compromised. In all, banks
worldwide are estimated to have made US$66 billion in provisions, in
effect shrinking the pot for loans by US$660 billion.

But the fallout has been much less pronounced in Asia, and
this is stoking optimism that the party will get going in this part
of the world again. “There’s plenty of money available for acquisitions
and investments anywhere in the region,” says Neil Galloway,
managing director and head of M&A/ECM Asia for ABN
Amro. “When the merry-go-round stops [in the United States],
everything stops. Here in Asia, you still have liquid local and
regional banks and private client wealth supporting IPOs.”

While selling global bonds and raising debt funding for leveraged
buyouts may be a hard slog at the moment, the region’s
investment bankers say Asia’s underlying growth story remains
unimpaired. True, stock markets have come down sharply from
record highs, which might discourage IPOs and follow-on offerings.
But, argues an investment banker who handles equity syndicates:
“Asia had an absolutely phenomenal year and investors
are now taking a step back to ensure expectations are brought
back into sync. The drinks are finished, and we’re just getting to
the next round.”

The biggest deals in Asia in the past year have been outbound
M&A, led by Tata Steel’s US$13.6 billion acquisition of Anglo-
Dutch behemoth Corus. Figures compiled by Thomson Financial
show that outward acquisitions in Asia (ex-Japan and ex-Australia)
in the year to November have breached the US$84 billion mark,
which is up 99 percent from the same period last year, and is nearly
12 times the total of 2003. Singapore-headquartered companies
topped the cross-border buyers’ list with US$21.5 billion, followed
by India with US$20.1 billion, and China with US$18.9 billion.

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