Treasury Practice

Going public

Published: Jul 2016
Silhouette of man looking above city at night

China’s economy is slowing, commodity prices are up and down, and a political crisis is brewing in the European Union. No wonder companies in Asia Pacific are adopting a ‘wait and see approach’ when it comes to their first stock listing. Treasurers, however, will have a key role to play when the right time eventually does come to go public.

Few decisions in the life of a company are quite so monumental as the decision to go public. Once a private company’s directors have agreed to do an IPO, the business will never be the same again. New sources of capital may need to be considered, new bank relationships nurtured, new reporting duties executed. And all of this, naturally, puts the work of the corporate treasurer very much in the spotlight.

More companies in Asia Pacific will be undertaking a first public offering this year than in any other region in the world. But before all these firms head to the Hong Kong, Singapore or Shanghai Stock Exchanges, a great deal of preparatory work will need to be undertaken. Here we take a look at what’s likely to be in store for the corporate treasurer.

Timing it right

Once the IPO process has been set in motion one of the most crucial jobs for a company’s financial executives will be deciding at what point market conditions will be right to achieve the best result.

Right now it would seem that many firms in Asia have looked at the markets and concluded that the stars are not quite yet aligned. Although Asia Pacific continued to lead other regions for IPO activity in Q116, with 102 deals raising US$6.6bn, this represents a marked decline against the first quarter of last year. According to figures from EY, deal numbers in Q115 were 31% higher and the total capital raised was 55% higher.

“Lately IPO activity has been relatively muted in the Asia Pacific region,” says Max Loh, ASEAN and Singapore Managing Partner, EY. There are no shortage of external factors to blame: concerns over the condition of the global economy, volatile oil prices, and uncertainty in the capital markets. For all these reasons, Loh says, a “wait and see approach” has become the preferred strategy for many companies.

“We think companies are holding off for better valuations,” he says, “especially for the bigger transactions. A lot of the activity is supported by private equity and venture capital, and those companies can afford to wait and ride this volatility out.”

What a contrast with the previous year. In 2015, the Asia Pacific region dominated global IPO activity with Hong Kong, Japan and Mainland China topping the global leader boards by capital raised. Overall, 673 IPO deals (55% of listings globally) were made and nearly half the global capital raised last year emanated from the region.

Understanding what drove the record issuance we saw last year may tell us something about why companies are currently biding their time. “A lot of the companies that are listing in Hong Kong are actually mainland Chinese companies,” says Loh. “I think the the PRC (People’s Republic of China) will remain a key pillar of IPO activity in the short to medium term. But, of course, there is some softness in the market at the moment given increased investor concern over China’s economic fundamentals.”

Aurizon’s IPO journey

When the Queensland State Government announced plans to sell off QR National Ltd in 2009, Erin Strang, then the rail freight operator’s treasurer, knew she would have her work cut out.

The company would be split into two businesses, with Queensland Rail’s commercial activities to be separated from the government’s passenger services and eventually floated in late 2010. For the company’s treasury, there would be a lot to do in a very short space of time. “Once that decision had been made treasury had an involvement,” says Strang. “The equity market was a bit up and down in the lead up to the IPO but the end result was that we successfully listed.”

Raising funding

The success of what would become Australia’s largest IPO in 13 years was in no small part due to the hard work of Strang and her colleagues in the treasury department. Amongst other things, the company would need to consider how historical funding arrangements would be replaced with new ones. New bank relationships would also need to be formed.

“We had been government funded up until that point, so we had to think about how that existing debt structure was going to be resolved,” she says.

Even though there were no immediate plans for a bond issue, Strang says the company chose to solicit two credit ratings given the greater flexibility this would provide them down the track: “The initial debt was a bank facility, because of the timing and the ease of execution. But from the start the intention was always to diversify that and get greater diversity and tenor, which is what we have got today. Since then we’ve gone into the euro MTN and A$ bond markets.”

Building relationships

Forming and fostering the relationships with the credit ratings agencies and new banking partners the company needed post-privatisation was also high on treasury’s agenda during this time. A regular meeting framework was established and the half-yearly and annual updates were provided to give the credit ratings and banks the same transparency as enjoyed by its equity investors. “The value of that has really been seen since then as refinancing has been relatively straightforward. I think that is really because we’ve had a good relationship with our banks, as well as being done through fairly good times from a business perspective.”

Advice for treasurers

Asked what advice she would give to a treasurer of a company now planning its own first listing, Strang says it is all about balancing the end goal with the practicalities of the time available to execute the transaction. “Treasurers need to think about where it is the company needs to be and the stepping stones towards that,” she says. “They need to determine the absolutely critical dates from an IPO perspective, and consider how they will manage those dates.”

To that end, working out how one will respond if something does not go to plan can be beneficial, she adds. As anyone who has dealt with debt capital markets will know, rapidly changing conditions mean it is always good to have a backup plan. After all, the last thing any treasurer would want is that the company’s IPO doesn’t go ahead because they have not been able to get funding in place.

However, Strang cautions, the long-term consequences of an IPO leave little room for mistakes. “Whatever funding arrangements you put in place you are going to be living with them for some time, so it’s important that treasurers give themselves some flexibility.”

Where to list

At the same time as finance executives monitor market conditions and ponder the timing of their IPO, the small matter of where to eventually list the business will also need to be considered. Here in Asia there are no shortage of options for international companies.

Hong Kong, in particular, had a bumper year in terms of new companies listed and funds raised. “We saw a lot of activity last year,” says Doris Ng, Of Counsel, at Norton Rose Fulbright in Hong Kong, a global legal firm that assisted in some of the region’s biggest transactions last year. “HKEx ranked number one in terms of funds raised last year worldwide, ahead of some major exchanges like London and New York. The Hong Kong exchange is the clear leader of the two. In fact, last year HKEx saw the most activity of any exchange not just in the Asia Pacific but the world, with 38 new companies listing and an enormous HKD 260bn of funds raised.”

There are a number of reasons for the popularity of HKEx. To begin with there is the investor base. Norton Rose Fulbright’s Ng says that the exchange’s strong base of institutional investors are a big part of the attraction for Chinese companies. “Traditionally it has been the PRC businesses driving IPO activity in Hong Kong,” she says. “The other exchanges in the PRC tend to be dominated by retail investors. That’s why companies looking for a strong shareholder base often come here to access international institutional investors such as the pension fund and private equity fund investors.”

The legal system is another perceived advantage. Previously a British colony, Hong Kong has a commonwealth legal system in which the rule of (Anglo-Saxon) law prevails and an established regulatory regime that, though not a full democracy, operates in a multi-party environment, meaning that companies listed on the island’s stock exchange are always closely scrutinised.

Such scrutiny offers much comfort to investors, Ng says: “Also in its favour is the fact that HKEx regularly reviews its rules and policies to ensure that they reflect international best practice,” she notes. “The stock exchange has run for many years too. It offers a transparent and well-regulated market for companies of all types and background, and it’s well respected for corporate governance standards and the quality of the companies that list here.”

One final explanation for the salience of HKEx is the China-link. For near three decades Hong Kong has been the most popular destination for share listings from Chinese state-owned and private enterprises, and the exchange has for that reason grown rapidly with the Chinese economy averaging double-digit growth during the same period.

That Hong Kong is a sovereign territory of China has evidently been a factor in the favour HKEx receives from Chinese companies. As EY’s Loh explains: “With everything else remaining equal the home exchange is usually the most favoured destination,” he says. “That’s because the market already recognises and understands the company, meaning its financial executives do not need to spend a lot of time and money convincing investors of the business proposition.”

The Singaporean market, meanwhile, is much smaller than that of Hong Kong. According to the latest figures, Singapore’s total market cap currently stands at $107.18bn, nearly nine times smaller than HKEx’s total market cap of $4.105trn according to Bloomberg data.

But the Singaporean exchange (SGX) does have advantages for certain companies, and is particularly attractive to companies in the APAC region that don’t have bourses in their own countries. With more than 40% of its listed companies hailing from outside the island, the SGX sells itself to investors and issuers as an ‘ASEAN gateway’ bourse.

“The domestic market is small in Singapore, so it has to be augmented by overseas companies wanting to list there,” says Loh. “It’s seen more as a pan-regional exchange – their value proposition has always been on the flow of financial capital for South East Asia, and it continues to attract overseas companies from around the region to list on it.”

IPO and beyond

While external conditions are often critical factors in companies’ decisions around when and where to go for that first stock listing, internal issues can also have a strong influence on what is decided. In many of these the corporate treasurer has a very important role to play.

First and foremost the company must be suitable for listing on the exchange of its choice. Suitability for listing is determined by a range of different factors, including legal compliance, commercial conflict and reliance issues. Not only must the business ensure it is in line with every local law and regulation governing its business. It must also be sure to avoid falling foul of conflicts of interest (parties involved in the IPO holding a stake in the company for instance) or over reliance on one or two customers or suppliers. Neglecting to do so might turn off investors or invite fines from regulators.

We think companies are holding off for better valuations, especially for the bigger transactions. A lot of the activity is supported by private equity and venture capital, and those companies can afford to wait and ride this volatility out.

Max Loh, ASEAN and Singapore Managing Partner, EY

Ng adds that treasurers and other financial executives will also need to be cognisant of how any acquisitions in the run up to an IPO might influence the outcome. “For any company that is preparing a listing in Hong Kong we would look at its trading record for the last three years before it applied for a listing,” she says. “Since any material acquisition, or significant corporate or business changes might have an impact when the regulator considers an application, companies planning an IPO need to be very careful of how they structure such transactions.” The work around an IPO does not end once all the above internal issues have been considered, underwriters and sponsors appointed, roadshows conducted and the launch successfully executed. On the contrary, for the treasurer little will remain the same going forward.

“An IPO is a momentous exercise,” Loh says, “one that I always compare to getting married.” What he means by that, he adds, is that when two people get married, it is indeed a significant milestone but the work does not stop there. “There are a lot of things that the treasurer will need to get in order – processes, systems, controls and governance – that perhaps people do not pay as much attention to at a private company.”

And given that investors are, at the end of the day, looking for returns, the spotlight tends to fall upon the treasury department like never before. Companies need to be able to show a solid set of books on an ongoing basis and cash and risk management, therefore, become increasingly important. “This is where the treasury department has a really important role to play,” says Loh. “How the treasury manages areas such as liquidity risk, FX risk, and credit pricing risk can give a lot of comfort to investors. Above all they want to know that the company they are investing in has a strong treasury function and is able to sustain itself going forward.”

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