After blistering year, market may get picky over who it rewards
SINGAPORE) With first-day closing premiums for initial public offerings (IPOs) regularly shooting for the moon, it has been a great 2007 for local IPO investors so far. But market players warn that the recent US sub-prime fallout means it is now less likely that prices will surge on the first day of trading.
The local IPO market has roared this year, with 37 listings of companies, real estate investment trusts (Reits) or business trusts raising over $4.7 billion. Strikingly, 19 - or more than half of these - saw first-day closing prices of 50 per cent or greater than their issue price, compared to just 14 out of 61 IPOs for all of last year.
And twelve out of the 19 saw prices double or more on the first trading day, compared to just three listings in 2006 that achieved this milestone.
But a whiff of caution and uncertainty could now settle over the market.
Concerns over the US market for collateralised debt obligations (CDOs), which recently led French bank BNP Paribas to freeze US$2 billion worth of funds over difficulty in calculating their value, have led to rising interests rates and drying up of liquidity in other markets.
Banks are generally facing difficulty in placing shares to institutions or marketing to retailers, especially for issues with weaker fundamentals, one market source said. 'Seeing the share price surge on the first day of trading is not a sure thing any more.'
Patrick Lee, head of UBS investment banking for Singapore and Malaysia, added: 'Placements will be more challenging in this environment. The more risky deals will be more difficult to push through. Investors are more focused now on seeing how markets trade and in managing their portfolios.'
He said there was still anxiety over credit markets and the sub-prime fallout. 'The problem is that people don't know how widespread the contagion is. Once they do, the market will normalise,' said Mr Lee.
But deals are still going through, he added, pointing out that Parkway Life Reit, which launched its IPO last week, was 'priced very successfully' near the top of the range, with the institutional tranche 14-15 times subscribed. 'What helped is that Parkway is a good name and the Reit space in Singapore is well regarded,' said Mr Lee.
Other sources said the current market sentiment will have more impact on yield-based instruments than pure equity plays.
'CDOs and Reits are all part of yield-based instruments. So when there is a default in one category of these, it will typically cause a re-pricing of risk premiums. For pure equity plays, equity pricing may be affected, but it is unlikely that you will see drastic actions such as a pullout of the IPO,' the source said.
Some investors may point to Arcapita, the Bahrain-based bank that last week called off the planned listing of a US$300 million investment trust in Singapore. But sources told BT that Arcapita withdrew its IPO because private investors looking to buy its wind farm and water utility assets at higher valuations had approached the bank directly even before the recent market downturn.
Otherwise, the IPO pipeline remains robust. 'The US sub-prime mortgage and CDO situation has not affected our listing pipeline', Lawrence Wong, head of listings at the Singapore Exchange (SGX), told BT.
'We continue to see a healthy pipeline of mandates and interest shown by investment banks and intermediaries on a listing on SGX,' he said.
At DBS - one of the underwriters for Arcapita, along with Morgan Stanley - the bank's head of equity capital markets, Kan Shik Lum, says Asian economies are still robust and the IPO pipeline in Singapore and Hong Kong is going strong.
Though the CDO woes have resulted in the current market volatility and undermined investor confidence worldwide, IPO candidates with strong fundamentals can expect to launch their deals on time and even price their issues aggressively, he said.
'But the chances of some issuers delaying or aborting their fund-raising exercises cannot be discounted,' Mr Kan added.
UBS's Mr Lee said the bank expects markets to remain choppy for the immediate future. 'Although we will see less issuances, there will be a larger proportion of top-quality names because they can still get deals accepted.
'There is still a lot of liquidity and interest in Asia. You will see people coming back to the market, because Asian companies are still doing well,' he said.
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