A version of this feature was published in FinanceAsia's December 2021 magazine.
Year-end is normally punctuated by a reflection on successful achievements and the assessment of aspirations across the year to come. But as the end of 2021 came and went, it remains challenging to gauge how 2022 might play out.
While a number of factors have contributed towards global economic recovery and social progress: low interest rates, successful vaccination roll-out and for many, a recalibration of personal priorities and financial portfolios, there is a sense of despondence as we all add yet another letter of the Greek alphabet to the vernacular.
But there is hope. While governments may be ramping up restrictions and airlines announcing flight bans, there is a sense of urgent proactivity amid current action that contrasts the hesitation and uncertainty experienced this time last year.
FinanceAsia speaks to the region’s banking and advisory community for their observations on the market opportunity offered by M&A, ECM, and DCM, the trends that they have witnessed up until the start of 4Q21, and those that may advance.
M&A
“M&A is a confidence game,” said Richard Griffiths, head of M&A, Global Banking APAC at BNP Paribas.
“There was a pull-back as Covid restrictions rolled out, but recently there is a strong bounce-back in consumer demand, investor confidence and M&A activity. 2021 is the strongest opening nine months for M&A on record.”
Joydeep Sengupta, senior partner at McKinsey & Company’s Singapore office agreed that Asia’s markets have “come of age”, with a display across the region of maturing, well-balanced products.
“The product mix is now more aligned to global investment bank markets,” he noted, adding that a surge in deal-activity during the year came on the back of low-cost liquidity and equity markets at an all-time high.
But a move by the Fed to reposition the markets with an inflation hike following a protracted period of monetary and fiscal stimulus, could cause shockwaves to ripple across liquidity pools, provoking a meaningful market correction.
Elliot Hentov, head of policy research with State Street Global Advisors’ Global Macro Policy Research team commented on the potential impact of turning tides. “The rise in inflation and expected monetary tightening will affect the calculus... Nominal rates will still remain attractive by long-term standards, but the tailwinds of cheap financing and massive liquidity will begin to recede.”
Mark Uhrynuk, Corporate & Securities partner at Mayer Brown, commented that while M&A activity has continued apace following a lull in 2019, “parties are more attuned to potentially negative impacts on certainty of payment and corresponding liquidity concerns arising out of future disruptive events.”
The pandemic may further fuel M&A activity in the distressed space, as investors pursue deals at discount, shared Maria Tan Pedersen, Singapore-based Partner at Dechert.
Developments around material adverse change provisions, due diligence, and valuation and price adjustments are the key areas that Uhrynuk identifies as having greatly impacted M&A behaviour across the region in recent months.
“Buyers and sellers must consider whether or not a Covid ‘add-back’ is required to adjust a target’s EBITDA. This would allow for a fairer valuation, by assessing and addressing the impact of the pandemic on the target’s financial performance.”
The Asian landscape of 2021 has additionally been marked by changing regulation that is set to influence dealmaking going forward.
While Bagrin Angelov, head of cross-border M&A at CICC witnessed China inbound activity by multinationals double year-on-year in the first half of 2021 to $30 billion, Lars Aagaard, head of M&A and head of Financial Sponsors at Barclays APAC, warns that the evolving regulatory environment of the Chinese market, coupled with the overall conducive environment of high asset prices, may drive sponsor exits from the region, especially those operating in the private sector.
However, Clifford Chance partner, Bryan Koo notes that other regions are also likely to adjust across the regulatory space. “The areas to watch out for are antitrust merger control and foreign direct investment regimes in various jurisdictions, as they have a direct impact on the likelihood of success for M&A transactions.”
Head of Investment Banking at Natixis, Raghu Narain, attributes the biggest impact on Chinese activity to supply chain woes, as investors aim to rebalance their market reliance. “Some corporates are divesting supply chain reliance on China, others are further investing in China.”
Hentov added that, “the near-term challenges remain formidable, with supply chain issues, the China slowdown and energy prices being particular headwinds.”
But as some investors pursue China exits, Aagaard notes the potential uptick offered by other regions.
“We have been busy across Asia and see elevated activity in Southeast Asia and India. [They] are emerging relatively stronger out of the pandemic – we expect this to have an impact in the medium and long term.” He added that within these markets, digital infrastructure, green energy, fintechs and the healthcare sector are witnessing huge investment.
“These markets are offering superior growth opportunities, which is attracting significant capital. This is an area where global financial sponsors will continue to be very active,” he said.
According to EY’s latest edition of its Asia Pacific Capital Confidence Barometer, respondents in Asia Pacific expect optimistic growth opportunity across the region, particularly in Southeast Asian markets (33%), followed by India (15%) and Oceania (15%).
Griffiths pinpoints two sectors in particular, as gaining significant traction. “The Technology and electric vehicles (EV) sectors are hot right now…Throughout Covid, clients have taken cost out, repaired balance sheets, focussed on organic growth. Now M&A is important to position businesses for growth. The focus is on technology, ESG, and new growth outlets in using M&A as a way of improving businesses.”
He added, “ESG considerations will increasingly affect M&A – 65% of corporates globally consider ESG when evaluating investments and 60% have not pursued an investment due to ESG concerns.”
Uhrynuk concluded that while it is difficult to ascertain whether the pandemic will have long-term effects on dealmaking, “given the speed and manner in which the pandemic impacted businesses, it would not be surprising that these recent experiences shape the approach to M&A deals in the post-pandemic world.”
ECM
Natixis’ Narain highlighted the emergence of special purpose acquisition companies (SPACs) on the Singapore Exchange (SGX) and eventually Hong Kong as “a major theme giving rise to both ECM and M&A activity.” New SPAC listing rules introduced by Singapore in September 2021, as well as those under development in Hong Kong, are likely to increase SPAC and de-SPAC activity in the region.
The Hong Kong SPAC regime “will potentially attract companies from Greater China or the Southeast Asia region to seek listing in Hong Kong through this alternative route, which would increase the diversity of our overall equity capital market activities,” said Stephen Chan, Hong Kong-based partner at Dechert.
Hong Kong’s proposal – while likely to be more stringent than those of the US and Singapore – will provide an additional listing option and complement an already strong IPO pipeline, said Rocky Tung, head of policy research at the Hong Kong Financial Services Development Council (FSDC).
The active public applications pending on the Hong Kong Exchanges and Clearing Market (HKEX)’s main board include potential high-profile names such as: China Tourism Group Duty Free Corporation, SenseTime and several healthcare leaders, Tiger Cong, head of Capital Markets at CICC said, citing HKEX data.
New energy, advanced manufacturing and healthcare are sectors which could offer the most deal supply and return for investors in 2022, experts said.
New economy and technology “homecoming IPOs” – that is, secondary or re-listings of Chinese companies in Hong Kong and mainland China – are likely to contribute to Hong Kong’s market resilience in 2022. This year’s homecomings include those of Chinese search engine, Baidu and video streaming provider, Bilibili’s secondary listings in Hong Kong in March 2021.
While Hong Kong’s exchange has always been an attractive proposition for Chinese companies, China’s education reforms and cybersecurity regulations could prompt US delistings, which will add to the homecoming scene, explained David Liu, Asia Pacific head of Compliance Risk and Diligence at Kroll.
Christopher Wong, head of ECM for Asia Pacific at BNP Paribas, agreed that the impact of changing Chinese regulation will be felt by capital markets: “regulatory efforts in the China education space [which include a ban on private tutoring firms from publicly listing, seeking profits, or receiving foreign investment] have been severe and as such, this is a sector which will clearly be impacted in the coming year,” he said.
Corporate & Securities partner at Mayer Brown Jason Elder thinks that the US’ implementation of the Holding Foreign Companies Accountable Act (HFCAA) should also be closely monitored.
But in spite of the uncertainty, regulatory controls and geopolitics may bring about some positive trends across equities, including the rise of domestic market capital raisings in Indonesia, India, Korea, and others, said Kelvin Teo, APAC head of Equity Capital Markets at Barclays. He suggested that the window of opportunity for private companies and unicorns outside of China offers significant potential.
Capital market reforms in Indonesia, including the recent introduction of dual class shares, is also likely to boost domestic IPO activity in 2022. The market’s IPO pipeline includes the dual US-Indonesian listing of GoTo, the entity resulting from a merger in May between Gojek and Tokopedia, which will benefit from the introduction of dual class share with different voting rights.
“We are likely to see the increased use of dual class share voting structures, particularly for tech startup companies where founders seek greater control after listing,” said Pedersen.
Bukalapak’s $1.5 billion IPO in August 2021 made it the first Indonesia “unicorn” to seek a local listing and is also likely to pave the way for further unicorn listings the Indonesian Stock Exchange (IDX).
Finally, 2020 reforms to the REIT market in the Philippines, including the lower minimum public ownership of REITs, is likely to push activity on the Philippines Stock Exchange (PSE), though it is likely to remain mainly domestic, said one senior banker.
DCM
ESG and China also constitute two clear themes for 2022 for debt capital market observers. In line with continuing demand from investors for ESG products, experts expect a rise in the issuance of green and sustainability-linked bonds, particularly those that are project-related. There will also be pressure from governments and regulators to scale up green finance and support for initiatives that support economies’ moves towards net-zero.
“ESG matters will continue to be an increasing focus for ASEAN sovereigns and corporates as well, and we believe that the number and volume of green, social and sustainability-linked bonds will continue to rise in ASEAN,” said Allen & Overy partner Jaclyn Yeap. The progress towards a clear and consistent taxonomy will also help the region catch up with European efforts in this regard.
Nascent types of ESG products, such as social and governance bonds, are also expected to rise, prompted by the Covid-19 pandemic.
Meanwhile, experts foresee further offshore issuances by mainland China municipal governments, such as Shenzhen’s RMB5 billion ($775 million) issue of conventional and green bonds in Hong Kong in October, and Guangdong’s subsequent RMB2.2 billion issuance, in Macao. The transactions mark the first time that Chinese municipalities have tapped the offshore renminbi bond market.
“We are expecting to see the momentum to continue for more debt issuances by Chinese issuers in the investment grade space in 2022 and beyond,” Yeap added.
However, issuance of high yield bonds by Chinese property firms is expected to stall as a direct consequence of the recent Evergrande liquidity crisis and similar issues by other Chinese high yield bond issuers.
In South Asia and ASEAN, state and other investment grade issuers of G3 bonds (i.e. bonds issued in US dollar, euro or Japanese yen) will look to take advantage of short-term, favourable market conditions. They will do this in order to front-load capital raising, given the prevailing uncertainty heading into 2022, said Clifford Chance partner, Gareth Deiner.
“Issuers in the renewable energy sector have been particularly active and have found positive demand given the rarity value of ESG-focussed investment grade credit from Asia Pacific, for European and US investor bases,” he added.
