China Galaxy's IPO bookrunner record sets grim stage for bankers

HONG KONG Mon May 6, 2013 4:23am EDT

HONG KONG May 6 (Reuters) - State-owned China Galaxy Securities Co Ltd set a record for Hong Kong's IPO market on Monday, with a total of 21 banks working as joint bookrunners on its $1.37 billion offering.

That smashes the previous record of 17 banks set last year by state-owned insurer PICC Group for its $3.6 billion IPO - and is a sign of lean times for Asia's once booming stock issuance industry.

The large number of banks involved in the China Galaxy Securities IPO shows just how much companies are calling the shots on bankers in stock and bond sales, and highlights the shrinking revenue pot in Asia for investment banks. The more banks that are involved in a deal, the smaller the piece of the pie they each get.

"This is a bloodbath. There just isn't enough business in the market. There's an over-supply of bankers and an under-supply of clients," said Keith Pogson, Managing Partner for Financial Services at Ernst & Young. "All the bargaining power is with the issuers and not with the banks. This is the new normal."

The China Galaxy Securities initial public offer comes at the same time that Sinopec Engineering, part of Asia's largest oil refiner Sinopec, is offering 1.33 billion shares in a $2.24 billion IPO - a signal that there is still a pulse in Hong Kong's moribund IPO market. The two deals should set the tone for IPO activity in Hong Kong, which topped global rankings for such deals in 2009 and 2010, Thomson Reuters data shows.

But even if these deals trigger a series of other offerings, the outlook for equity capital market revenues in Asia Pacific remains sober in the current climate.

China Galaxy Securities initially mandated its own China Galaxy International unit, Goldman Sachs and JPMorgan to manage its IPO. In March, it added 13 banks and the list grew by another five as the deal was launched on Monday.

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The combined $3.5 billion to be raised by China Galaxy Securities and the Sinopec unit signal a pick-up in activity after IPO issuance in Asia ex-Japan slumped 56 percent to $3.3 billion in January-March, making it the worst start to a year in the region for new share listings since the first quarter of 2009, according to Thomson Reuters data.

IPOs in Hong Kong are down by a fifth so far this year to $1.05 billion - trailing even Iraq and Mexico - and last year's total of $7.72 billion worth of deals was the lowest in volume terms since the 2008 global financial crisis.

In the 2010 bumper IPO year for Hong Kong, Asia's top three investment banks each earned an average of $289 million in equity-related fee revenue, according to Thomson Reuters data that excludes Japan and Australia. Last year, that figure fell to just $92 million.

For deal-starved bankers today it's a tough balance between being on unprofitable deals and keeping clients happy.

"Investment banks are all trying to get league table credit and show something to the head office," said one Hong Kong-based investment banker, who was not authorized to speak publicly on the matter. "I suspect only half or less are making any real money out of it."

The only major investment bank with a strong equities business not on the China Galaxy Securities line-up is Morgan Stanley. Reuters could not confirm whether the New York bank was excluded or chose not to be part of the crowded deal. Morgan Stanley declined to comment.

China Galaxy Securities, which plans to use most of the IPO proceeds to expand its margin financing and securities lending business, and also its securities trading business, agreed to pay a base underwriting fee of 2 percent of the IPO proceeds, with an incentive fee of up to 1 percent, Thomson Reuters publication IFR reported on Monday. That compares to the 2.5 percent paid by PICC last year and 1.75 percent AIA Group paid for its $17.8 billion IPO in 2010, which had 11 bookrunners.

Banks dedicate entire teams to large-scale IPOs, ranging from more junior bankers to managing directors and partners, committing resources that could otherwise be used to win new deals and boost revenue. The bankers taking part in the China Galaxy Securities process are aware that the hours spent on the deal may end up costing the bank money.

"We can't afford to do that," said a person involved in the underwriting, who didn't want to be named because of the sensitivity of the matter. "We've told these guys, this is not a charity."

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