Capital Markets Weekly: Ant Group to sell record IPO

Equity
This week's highlight is the Ant Group IPO on the STAR market in Shanghai, where 80% of the 1.67 billion share sale is to be allocated to strategic investors (a record proportion), and the parallel sale of an equal number of shares in Hong Kong.

Pricing for the deal was announced on 26 October. Shares will be sold at CNY68.80 (USD10.26) each in Shanghai and HKD80 (USD10.32) in Hong Kong. On a combined bases, the 3.34 billion shares initially offered will raise USD34.4 billion, well above the prior USD29.4 billion equity market record set by Saudi Aramco in 2019. Trading starts on 5 November. The sale can be increased by a 15% greenshoe to USD39.6 billion (which looks very likely, as described below).

On 30 October, media reports sources claimed that the Hong Kong retail portion of the issue had attracted HKD1.3 trillion (USD168 billion) in orders from 1.5 million subscribers, making it the most popular in history both by volume of demand and participation. The sources claimed that the retail tranche was 389 times subscribed. Additionally, media reports noted heavy interest in margin buying, purchasing the shares with borrowed funds, an indicator of a highly speculative market climate.

On the same day, the Financial Times reported that retail interest in Shanghai had reached CNY19.1 trillion (USD2.8 trillion) with the deal 870 times. It further noted that the greenshoe option was already being exercised in Shanghai, and that if the same applies in Hong Kong, as is highly likely, total proceeds from the sale then would reach USD39.6 billion equivalent.

According to the Financial Times using Refinitiv data, the sale in Shanghai will take equity issuance there to USD52.6 billion, placing it ahead of Nasdaq as the most active primary equity source worldwide during 2020 (Nasdaq sales reportedly total USD38 billion so far in 2020).

Mainland Chinese data center firm GDS also followed the recent trend of US-listed Chinese firms such as JD.com and NetEase seeking listings targeting domestic and regional buyers. The company, which listed on Nasdaq in 2016, has sold 160 million ordinary shares on the Hong Kong stock exchange, raising HKD12.9 billion (USD1.67 billion). In June, it had been reported to be seeking around USD1 billion from the secondary listing.

It will be followed by Chinese private education firm New Oriental, which is NYSE listed, and is seeking to place 8.5 million shares plus 1.3 million shares in a greenshoe overallotment facility. Based on its US valuation at the time of launch, the Hong Kong sale could raise roughly USD1.4 billion.

In the week starting 26 October, in the lead-up to the US election, 13 companies also are planning US IPOs.

Of these the largest is Chinese retail loan provider and wealth manager Lufax, which is seeking to sell 175 million shares at USD11.5-13.5 per share on the NYSE. The firm had a credit portfolio of CNY 519.4 billion (USD74 billion) and online wealth management assets of USD53 billion as of end-June 2020, ranking second and third in these segments. It specializes in lending to small business owners and salaried workers and in providing wealth management to China's "fast growing middle class and affluent population", claiming to cover markets underserved by traditional banks and on-line platforms, notably through having stronger capacity to price credit risk.

Ohio-based online insurer Root sold 22 million shares at an increased price of USD27 each, versus guidance of USD22-25, with a further 2.6 million shares sold by existing shareholders. The company also is raising USD500 million from two private investors at the same price.

In the week to 23 October, five IPOs and 17 SPAC deals were undertaken. Of these, the largest deal was for online security provider McAfee, which raised USD740 million pricing at below the mid-point of its indicated range but ended the week at a 6% discount.

IT firm Datto raised USD594 million at the top of its range and obtained a 7% premium.

Renaissance Capital reports that despite the rush of SPAC deals, their performance is at best mixed. It claims that since 2015, under one-third (31%) of SPAC deals have achieved a premium, with the largest deal - for Multiplan, a USD1 billion offering in February 2020 - down 22.7%. It noted that eleven SPAC deals have been downsized in recent weeks, an adverse indicator for ongoing demand.

Following the successful recent Allegro IPO on the Warsaw Stock Exchange, pay-tv firm Canal+ Polska has announced an IPO, seeking to place the 32% stake held by TVN Media (owned by Discovery) and the 17% owned by Liberty Global. Vivendi, owner of the remaining 51%, is retaining its investment.

Emerging market debt

Within this week's limited activity, Mexican telecommunications firm Total Play Communications is marketing a debut dollar deal of intermediate maturity.
Within limited EM supply, Riyadh-based Arab National Bank raised USD750 million of Tier 2 sukuk debt on 22 October, priced with a 3.326% profit rate according to S&P Global. According to Refinitiv data, pricing was set at 290 basis points over mid-swaps versus initial guidance of 325 basis points.

Sharjah has announced that it is tapping its 3.324% 2029 sukuk issue, originally sold in 2019.

Etihad Airlines is arranging a so-called "transition" sukuk. The five-year dollar-denominated deal, priced at mid-swaps plus 200 basis points, is designed to assist progress to a less polluting business framework.

Other debt

A report by Global Capital noted that banks have raised a total of EUR28.9 billion of Additional Tier 1 capital during 2020, the second highest total on record. The highest total was in 2019, when EUR34.9 billion was raised.

Our take

This week's issuance is lighter than in recent weeks, particularly in the debt markets, although Boeing and Michelin were among those with sizeable deals. The reduced calendar appears influenced by the pending US presidential election, but also reflects market sensitivity to deteriorating trends relating to the spread of COVID-19 with multiple European states tightening their restrictions on movement, raising the likelihood of deeper and more protracted economic recession, and larger budget deficits.

This does appear to be having a dampening impact on Emerging Market issuance. The slowdown in Latin American corporate bond sales comes on top of several recent deals from the region being withdrawn, with investor pushback and price sensitivity also indicated by recent withdrawal of the planned market debut issue by Turkey's state wealth fund, and by Ukrainian gas firm Naftogaz. The latter pulled its deal despite having gained over USD500 million of demand for a long six-year offering. Oman's recent new deal and existing outstanding transactions have performed badly in the last week, with its 2026 offering down some five points in price. Losses on the recent sale are an adverse indicator for future debt issues by Oman.

While Emerging market spreads generally are stable, official debt relief will be on a smaller scale than initially proposed by the IMF and World Bank (with a six rather than twelve- month extension) and with growing concern over how Chinese state-related lending is being treated, notably affecting China Development Bank (deemed by China to be a private lender). This is a sensitive issue in particular with regard to Zambia's efforts to seek private-sector debt relief, with investors concerned about potentially uneven treatment while the Zambian government has stressed that it would default if unable to reach an agreement to miss private-sector interest payments for six months as planned. With Suriname similarly planning to miss an interest payment next week, there are clear signs that private sector debt restructuring, even on a modest scale, is proving quite sticky.

By contrast, Ant Group's share sale is highly impressive, setting a new global equity record by a clear margin and boosting China's efforts to develop its equity capital markets. The deal gives momentum to efforts by Chinese firms to reduce their reliance on US markets, but Lufax's share flotation on the NYSE this week also shows that these remain of clear interest to Chinese firms. There have been no signs that US demand for Chinese assets has abated, further indicated by the 15% US allocation in China's USD6 billion multi-tranche bond issue recently.

Posted 30 October 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit