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KEY TAKEAWAYS: IFLR Asia Capital Markets Forum 2018

Keynote speech: David Graham, head of listing, Hong Kong Stock Exchange [HKEx]

• A major focus for the HKEx in the past 18 months has been backdoor listings and shell companies. It is clamping down on the issue through suitability reviews by its listing committee and enhanced listing criteria to make it more difficult for companies with minimal operations, which is typical for shell companies, to be successful;
• Hong Kong corporate governance code changes will come into force in 2019 with greater disclosure requirements for on independent non-executive directors independence and board diversity;
• The timetable for listing applications has improved with the HKEx increasing headcount for its listing department: it takes an average of 20 business days for the first comment letter and up to six months for full application approval;
• Under new biotech and weighted voting right (WVR) listing rules, the HKEx has received 11 biotech listing applications with four listed already, and four WVR applications with two listed already;
• Environmental, social and governance (ESG) reporting will be a big focus for the HKEx in 2019. The Exchange and the Securities & Futures Commission (SFC) will be launching a consultation on mandatory environmental disclosure.

International developments for 2018

• Increased divergence between US and EU views on Iran sanctions and a lack of uniformity on how different countries deal with imports from sanctioned countries are creating big challenge for compliance officers. For instance, Japan and South Korea continue to give exemptions for companies that import oil from Iran;
• Across Asia Pacific, there are 11 jurisdictions that have adopted national regimes for data privacy. Asian companies are dealing with the challenges posed by the extraterritorial reach of the EU’s General Data Protection Regulation (GDPR). AggregateIQ was the first company given a GDPR notice by the UK Information Commissioner’s Office;
• China is continuing to make its business and financial environment friendlier: recent initiatives include new Panda bond guidelines, the relaxation of ownership caps for wholly-foreign owned enterprises (WFOEs) banks and the opening up of its ratings market;
• The harmonisation of principles and standards for green bonds, including a new version of Chinese green bond standards, will bring Asian frameworks more in line with international standards. Hong Kong is pushing for more local green bond issuances with first time issuance incentives for green bonds but more education is still needed for asset managers to build interest.

Equity capital markets: Hong Kong and beyond

• Biotech is a battleground between US and Hong Kong stock exchanges to go after listings especially with new biotech listing rules that came into place in Hong Kong in 2018;
• Due diligence for new economy companies is still a work in progress in Hong Kong;
• There are concerns with poor post initial public offering (IPO) price performance for new economy companies as issuers and advisers differ on IPO price expectations;
• The US is equipped with a class action regime that creates a self-regulating situation so bankers and issuers won’t price deals to trade down;
• The HKEx has a biotech advisory panel that provides a second opinion to its listing committee on materiality. There are regulatory changes in the pipeline that could affect drug approval and issues on potential competitors that an issuer has not disclosed.
• -In the US, there is a problem with economy company IPOs being so closely connected with the issuer buying high concentrations of shares. This poses a risk to retail investors who are unaware of this: similar scenarios have taken place in Hong Kong’s growth enterprise market board where the SFC saw high levels of concentration in allotment results and had to threaten to pull deals.  

• Sixty-seven percent of high yield (below BBB- or unrated) issuances up to October 2018 were from greater China. Of these, 80% were from corporates, especially from the real estate sector;
• The Reg S format and the US dollar continue to be the dominant format and currency (preferred over domestic currencies due to limited liquidity);
• The use of pink offering circulars is more prevalent in tough markets, especially for debut issuers where investors request more time to study the company and analyse covenants before roadshows;
• Many 364-day issuances done in China in 2017 are now coming up for refinancing;
• With high global debt levels, more private placements and cashless exchanges are being done and club deals are more prevalent as side deals in lax jurisdictions;
• Going into 2019, there will be growing interest in frontier sovereigns especially as Asian jurisdictions spend on infrastructure.

Accessing China in 2019 and beyond

• The national interest card is being played for Chinese outbound investment deals that could have gone through. Chinese investors are looking for non-sensitive sectors and less sensitive target countries;
• China is opening up its financial sector to foreign investors through the relaxation of controlling stakes rules in securities and funds but there is still no level-playing field for foreign players with more rigourous requirements needed;
• There is growing interest in commercial real estate investment trust (C-Reit) market in China, the next stage in the opening up of China’s capital markets;
• To watch: Chinese companies are gradually developing compliance programmes in anti-money laundering, GDPR, sanctions.

• The possibility to do real-time delivery-versus-payment is a game changer for the Stock and Bond Connects, and also allows for so-called best execution which is important under Mifid II;
• To improve regulators’ market surveillance, a broker-to-client assigned number (BCAN) has been put in place for investors;
• Investors are now opting for the Bond Connect over the China Interbank Market Bond (CIMB) Direct as the set-up time is shorter. But the CIBM Direct follows PRC law, and allows for broader bond choices and interest rate swaps;
• An increase in brokers, more clarity on tax, and the possibility of carrying out hedging/repos will help to increase the attractiveness of the Bond Connect.

Maximising impact in debt capital markets

• The number of Asian deals has gone up in 2018 but the size has decreased 18% year-on-year. The biggest issuers in Asia are China followed by South Korea. Issuances come mostly from banks, real estate, asset management companies;
• The shift from public to private debt markets with increasing regulatory pressure on banks’ capital adequacy ratios could rival the private equity market in the next five years. Private debt assets are preferred because of stronger covenants;
• Foreign investors are more cautious with Chinese issuers, and lesser known issuers using up their debt quota with another month to go for 2018;
• The deleveraging cycle in China is happening but there is a danger of 'amend and pretend’ with state-owned enterprises stepping in and local restructuring driven by policy to take place rather than allowing market to work out bankruptcies.

Online capital markets - opportunities and risks

• Asian jurisdictions are fragmented in their approaches to the regulation of virtual assets with some going for outright bans (China), a proactive stance (Singapore), thoughtful (Hong Kong). There is a need for standardised regulation globally to avoid regulatory arbitrage;
• The issue of custody and how to hold digital assets securely so they cannot be tampered with and/or hacked are big issues, and will be key to having institutional players move into the virtual asset space;
• Diversity in products using virtual assets such as futures, options, funds, ETFs are attracting growing interest;
• Factors affecting investor confidence in exchanges include operating in a credible jurisdiction, insurance, security provisions, appropriate audits, capital buffers, AML policy in place and responsible trading.