Capital markets deliver big deals and challenges

Asia’s fast-developing capital markets last year once again provided rich pickings for lawyers, with an array of firsts across the equity and bond markets.

Alibaba smashed records with an $8bn bond sale and its $25bn initial public offering, examples of how Chinese companies are setting the pace in both innovation and eye-catching deals.

The Hong Kong government completed its debut sukuk , or Islamic bond, sale, something it hopes will foster an entirely new asset class in the city, while the $7.2bn financing package for Australia’s Roy Hill iron ore project broke new ground in resources investment.

Much smaller deals also attracted plaudits within the legal community. Chinese online retailer Cogobuy raised less than $200m from its Hong Kong listing, but solicited much praise for the legal team behind it, led by Christopher Betts of Skadden, Arps, Slate, Meagher & Flom.

Shenzhen-based Cogobuy was formed over the course of less than two years by combining three separate businesses — a longstanding electronics hardware trading entity, a logistics business and a website.

This created challenges for the legal team both in terms of presenting Cogobuy’s financial history and in crafting a coherent story about what the company was about.

Bolt-on acquisitions are common in the fast-growing technology sector, but can cause problems during the listing process in Hong Kong as regulators seek to understand whether a business is what it says it is.

“The real challenge was bringing together all these bits . . . and trying to present it as a natural progression of an underlying business,” says Mr Betts, who believes Skadden’s work has “set the benchmark” for acquisitive companies looking to list in Hong Kong.

The ultimate pitch was for a chance to buy shares in an ecommerce business that sold electronic components to Chinese manufacturers, but one that controlled its own warehouses and managed its own inventories.

Investors seem convinced. Since its trading debut in July 2014, the stock price has risen 223 per cent, while the company’s customer base has doubled in size over the past year.

Cogobuy’s IPO, though small, holds broader implications for Asian capital markets. Last year fellow ecommerce site Alibaba shunned Hong Kong in favour of New York for what would be the world’s biggest flotation. Others from the red-hot internet sector, such as JD.com, made the same choice, leading many in Hong Kong’s financial circles to question whether the city had consigned itself to a dull future as a tech-free listings hub.

Cogobuy has certain advantages that eased its path to Hong Kong. It has a record of profitability, a Hong Kong requirement, while the chairman’s substantial shareholding meant that dual-class ownership, which is not allowed in the city, was never a consideration.

Even so, the Cogobuy deal has shown that Hong Kong can work as a listing venue for ecommerce businesses, which could encourage others to follow suit.

In another China-related deal, Sidley Austin’s Tom Albrecht topped this year’s rankings for his firm’s work on the restructuring of LDK Solar, a solar-panel maker that ran into trouble when overcapacity in the sector crushed profits.

Sidley Austin faced a situation with little precedent: a Chinese company in need of restructuring, with both onshore and offshore creditors. Onshore creditors, owed something in the region of $2bn, would have to be convinced to wait for an offshore deal to be reached, rather than seeking to wind up LDK’s assets inside China and leaving international investors empty-handed.

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The firm also faced a jurisdictional problem. Any offshore restructuring would have to be agreed in Hong Kong, home for many of the creditors, the Cayman Islands, where the company was registered, and New York — the legal jurisdiction for the bonds themselves.

“We had to maintain progress, We could not afford any reversals,” says Mr Albrecht. “There were lots of naysayers who thought we couldn’t get it done.”

However, the onshore creditors were indeed won over, while a three-way legal process was successfully completed in December last year — saving LDK as a business, and with it 8,000 jobs.

While good news for LDK and its employees, the significance of the deal goes far beyond one company or even one sector. Chinese companies became the single biggest source of US dollar bond issuance in Asia last year, having borrowed very little just a few years earlier.

What happens when confidence is lacking became clear earlier this year, with the default on US dollar debt by Chinese property developer Kaisa. The company saw its bonds tumble, shaking the sentiment towards the whole sector and temporarily closing off the market to many of its peers. The lingering effects of the default can still be seen in the higher borrowing costs of China’s lower-rated property companies.

In contrast, LDK serves as a positive test case for international investors, who previously had no idea how a Chinese restructuring might work, or if a successful resolution could be found that would please both onshore and offshore creditors.

Mr Albrecht believes the LDK case has helped to build credibility in Chinese bond issuers at a time when Beijing is keen to see foreign investors lend to its companies.