Cross-border work pays dividends

The past year has seen a number of firsts in Asia’s financial markets, across different asset classes and geographies. As these markets grow and develop, there is an increasing amount of cross-border work, something the region’s lawyers have been wrestling with as they seek to navigate and balance regulations in multiple jurisdictions – even when working on a single deal.

UK-headquartered Linklaters has earned prominence for its work on Asian bond issues, particularly in helping mainland Chinese companies tap investors in new markets, or with new products.

One was the launch of renminbi-denominated bonds in Taiwan by Chinese issuers. Linklaters had a role in the first four such sales. Combined, they raised $1bn for four of the mainland’s biggest banks – Agricultural Bank of China, Bank of China, Bank of Communications, and China Construction Bank. The establishment of a renminbi bond market in Taiwan followed regulatory changes on the island in late 2013. Since then, renminbi deposits have risen fast to reach about Rmb250bn ($40bn) this year, making it one the biggest offshore centres for the Chinese currency outside Hong Kong.

The additional demand for renminbi assets from investors with long-term liabilities – namely Taiwan’s large insurance funds – has also helped develop the market globally by enabling companies to borrow in the Chinese currency for longer.

Another landmark deal for Linklaters was the first Basel III-compliant dollar bond from a Chinese bank, a $500m issue from ICBC (Asia), an offshore arm of the world’s biggest lender by assets. Banks globally are seeking to improve their capital ratios to meet regulatory requirements but, for Chinese banks, access to dollar bond markets offers a valuable new avenue to achieve those goals because of restrictions on rights issues at home.

Linklaters also helped create an offshore bond structure for property developer Gemdale, a template that has since been used for dozens of other issuers to help them attain better credit ratings when borrowing in international markets.

For lawyers, the challenges of working on international deals for Chinese companies are myriad. Juggling the requirements of Chinese, Hong Kong, Taiwanese, and international laws – as well as established market practice – makes it among the most complex task for capital markets lawyers in the region. It also involves educating borrowers on overseas markets, and persuading them of the benefits of diversifying away from traditional funding sources.

Meanwhile, financial reforms in China are gathering pace, making it difficult to keep up with changing rules.

Against that backdrop, Linklaters made a decision to focus on the offshore renminbi bond market – better known as dim sum bonds – and the arrival of mainland Chinese borrowers to international US dollar credit markets. In some ways, the firm has bet on the future of Asian bond markets – based on the notion that Chinese borrowers, led by the banks, will become increasingly powerful global forces. “For us, it’s not just important for revenue. We see it as a much longer-term project,” says William Liu, capital markets partner at Linklaters.

Three years ago, most of the firm’s work on bonds was representing the underwriters – usually international investment banks. However, Linklaters recently “switched sides”, with almost half its mandates now on the issuer side.

The hope is that this helps build long-term relationships with Chinese companies, just as they take their first steps into the wider global financial world.

“These Chinese banks have global ambitions. They are building up their capabilities and hiring talent,” says Mr Liu. “This is the growth story for us in Asia.”

Legal innovation was not confined to Asia’s debt markets last year – equity markets too saw their fair share of firsts.

US-based Skadden, Arps, Slate, Meagher & Flom attracted praise for its work on the listing of depositary receipts in Hong Kong (HDRs) by Japan’s Fast Retailing, known best for its Uniqlo clothing chain.

Though overseas companies have listed HDRs in Hong Kong before – with mixed results – this was a first for a Japanese company. Skadden’s team had to balance the needs of Hong Kong listing rules with those of the Tokyo Stock Exchange, which involved “a lot of nitty-gritty”, says Christopher Betts, partner at Skadden.

“We didn’t know what the finished product should look like. We had to create it from scratch,” he adds. While it is likely to remain a niche product, the firm has already had a few enquiries from other Japanese companies.

For Fast Retailing, the move is part of its broader global strategy. Previous HDR listings have largely been pitched as pure marketing exercises, with companies looking to raise their public exposure in Asia, particularly in China.

But Fast Retailing has put a structure in place that could, in theory, be used for financing acquisitions as it seeks to tap growth outside its home market.