Without any big moves in the equities, capital markets has become all about debt and - lawyers say - more complex structures are expected. Dave Major reports

It has been a mixed year, so far, for capital markets work in the Asia-Pacific region. Volatility in the equity markets - spurred on in part by international conflicts and the SARS outbreak - has kept investors away. Now, however, more optimism is around, with observers saying law firms should see more activity by the first quarter next year.

During the recent relative absence of significant equity work, firms have been focusing their efforts more on debt-side work.

'We've had a busy year vis-a-vis our competitors,' says Andrew Harrow of Allen & Overy. 'The markets have been relatively good in terms of debt, but quieter in terms of equity. Driving debt right now are the interest rates, which at the moment are at a record low, so people are taking the opportunity to refinance where they can. By contrast, investor appetite for new equities hasn't been there.'

Freshfields agrees that workflow has been uneven among its capital market team. 'Some parts of the business have been busy;others have not,' says Freshfields' Clive Rough. 'Our structured finance work hasn't been as busy as before. The main area of activity last year was Korea, which is much slower at the moment. On the other hand, we've been more active in straight debt and we've seen a lot of convertible bonds. We've heard that the straight capital debt markets work would start to tail off over the next few months, that it wouldn't be as strong as it had been over the past six months.'

Lawyers around the region are still talking about the Hutchinson Whampoa bond issue, which was as unexpected as it was big. At EUR3.6bn, it did just what Hutchinson wanted: established an Asia benchmark for a euro-denominated issue. What astonished many was the speed of the transaction, just three days.

'It wasn't significant from a technical viewpoint; it was just fast,' says Freshfields' Patrick Lines, who worked on the deal. 'There's probably a limited number of good quality names in Asia who could do a deal like that.'

Structured products
Freshfields points to a move from straight debt to convertibles. 'We've been working on quite a few convertibles. I don't think it will impact on the securitisation side of our business so much. That's very specific and is done for a number of reasons, not necessarily for the funds alone. Securitisation will come back and won't be affected by that. There may be a movement to more equity-linked things.'

Catherine Husted at Allen & Overy agrees that demand will increase for equity-linked debt, especially in Hong Kong.

'Although there's a reasonably active listed warrant market here, I think clients wanted more variety,' she says. 'What we've seen over the past year, and I expect to see this going forward, is clients coming up with what are basically debt products, but with a spin. It might be equity-linked, index-linked or credit-linked.'

Husted says that clients are expanding to different things rather than just the creditor of the issuer. Allen & Overy, she says, has been working on projects for clients to put debt programs together that will be fully registered in Hong Kong with regulators.

'I've seen a demand certainly over the past 12-18 months for the more structured debt products,' she says. 'It was clients and banks wanting new products. There's also been a slight change in legislation, which happened earlier this year, to make it slightly easier for people to issue debt products on a program basis.'

Securitisation markets
Lawyers say that governments around the region are pushing to develop their securitisation markets as a way to tap the potential inherent in their massive foreign reserves.

They point to the fact that Asian countries are exporting vast amounts of US dollar instruments to the US, getting back US dollars, and converting those dollars into local currency, which then end up in the hands of the central banks.

That puts upward pressure on their own currency, rendering their own exports less competitive. One strategy is to invest some of that money locally, but difficulty arises with a lack of high-quality companies able to issue bonds around the region.

If governments can encourage securitisation that means a relatively weak company can issue securitisation securities and they would be rated not on the quality of the originator, but on the quality of the underlying assets that secure the securitisation.

By encouraging the easier issuance of securitised securities, governments would open up an outlet for their foreign reserves and solve the problem for their central banks.

Despite Korea, Taiwan and Hong Kong having securitisation-friendly laws, the strategy has yet to unfold. In Korea, a spike in delinquency rates in the receivables that underlie the securitisations is putting a strain on future activity. The common viewpoint is that they expanded their consumer finance too fast, and it is now contracting a bit.

In Taiwan, as in Hong Kong, the stranglehold is due to plentiful sources of alternative funding, such as bank debt. Why bother going to the trouble of a securitisation if you can just borrow from a bank very simply and cheaply? Both jurisdictions are user-friendly, lawyers say, but the economic fundamentals are just not there.

The general consensus is that this year is not as good as previous ones for securitisation, but that over time - as more sophisticated financing needs emerge - securitisation will become a key option for institutions looking to finance.

Allen & Overy, along with several other firms, has been working with the SFC to streamline legislation to make it easier for people to offer structured debt to the public. The talks started a year ago, with the next meeting tentatively scheduled for September. No timeframe has been established, though changes could come into law within two years.

At the moment, there are two main pieces of legislation that contain offering restrictions - the company's ordinance and the SFC ordinance. The talks are aimed at moving the offering and security-related provisions under the SFC ordinance, much as it is in other jurisdictions.

'It is significant,' says Husted. 'The SFC wants to get a feel from the lawyers and the banks as to how they want to amend the offering provisions to reflect what the market wants. How would you want to see offerings structured? Is disclosure too onerous? What about leveling the accounting playing field between HK-incorporated companies and those incorporated elsewhere? What the SFC is doing is saying "this is a chance that won't happen again for a long time, so give us your wish list now".'

As for the future, Husted says the markets in the Asia-Pacific region will continue to develop along the lines of increasing diversification and complexity.

'People will continue to look for new products and innovation,' she says. 'In Korea, they're looking at doing listed warrants for the first time. In China, people are looking beyond bonds in China, asking for credit-linked structures and equity-linked deposits. I think what we'll see in the coming years is more pushing of the barrier ... getting as big an audience as possible for those products, with jurisdictions looking at new products that may be common in Hong Kong, Europe and the US.'

In order to do that, however, regulators in those markets will need to play catch up, says Husted.

'The risk may be perhaps that the legislation doesn't cover what you're trying to do. What we've seen is that in certain jurisdictions, for the structured debt products, you might be talking about straightforward debt, but then the laws don't really cover what we're trying to do. So we end up facing the positive challenges of the legal and regulatory issues to determine if the products can be offered there.'

REITs
Law firms in Hong Kong are also gearing up for the introduction of real estate investment trusts, or REITs. The SFC put out a consultation paper in March and revised rules were expected as ALB was going to print. They are likely to follow the Australian model, with tailoring for Hong Kong tax laws.

The idea behind a REIT is a regional exposure to property but with a guaranteed stable income flow for those holding the units. They are listed on a local exchange and sold by virtue of forecasted annual dividends. People buy it because they are high-yielding instruments. It offers people a stable return that is higher than putting your money elsewhere.

Allen & Overy recently acted on the first REIT involving Hong Kong properties. It comprises several shopping malls located in Kowloon and the New Territories, all owned by Cheung Kong. The REIT is in its public-offering phase in Singapore and is expected to close in three weeks. Freshfields acted for DBS bank, the main underwriter.

The market won't take off immediately because people need to digest the rules, but firms say they expect work to start at the beginning of next year. The transactions need quite a long lead-time. REITS are complicated and require a lot of documentation.

'We're very interested,' says Rough. 'If they take off, they'll be a good source of alternative work for us. It's a competitive market; we won't be making a killing on this.  You need the property expertise, the experience of listing on the Hong Kong stock exchange and the experience of having worked on these types of products in other jurisdictions.'

Andrew Harrow of Allen & Overy singles out two trends as defining the style of work lately - a shorter execution period and increasing due diligence.

'Windows that appear do so for only a short period of time, so issuers or borrowers want quicker deal time so they can act on that,' he says. 'The due diligence process is also longer and more intense, even in offshore transactions.'

The reason for that, says Harrow, is the "once burnt, twice shy" factor. 'In certain jurisdictions where there hasn't been a lot of activity, or where they may have suffered from the 1997 financial crisis, these are the first offerings coming to the market. The banks want to make sure everything is fully and properly disclosed.'

Major Asia-Pacific debt deals - international firms, 2002-2003

Allen & Overy
Advised Merrill Lynch on the issue of US$1.5bn guaranteed notes due 2013 by Hutchison Whampoa International (3/13), guaranteed by Hutchison Whampoa. A&O also advised Goldman Sachs (Asia) on the US$1bn reopening of the note issue in March 2003 and HSBC on the US$1bn reopening in May 2003, making it the largest single-tranche Asian bond ever. The notes are listed on the Luxembourg and Hong Kong stock exchanges

Baker & McKenzie
Advised Macronix International Co Ltd - a ROC-listed manufacturer of non-volatile memory integrated circuits - on its 2002 offering of fixed rate US dollar convertible bonds

Freshfields Bruckhaus Deringer
Advised Hutchison Whampoa on its recent EUR1bn bond issue. Hutchison Whampoa Finance - a wholly-owned subsidiary of Hutchison Whampoa Ltd - issued EUR1bn 5.875% guaranteed notes, which will mature on 8 July 2013. Hutchison Whampoa provided an unconditional guarantee on the notes.  This was Hutchison's second euro denominated issue following its EUR500m issue in 1999 and is the  largest euro denominated issue by an Asian issuer (excluding Japan) to date. The Freshfields team was lead by structured finance partner Patrick Lines

Herbert Smith
Advised the Asian Development Bank on the structured (partial cover) guarantees for US$750m bonds issued by Power Sector Assets and Liabilities Management Corporation as part of the Philippines electricity privatisation. Partner Jonathan Moult in Hong Kong led the firm's team

Linklaters
Advised on Hong Kong's largest-ever, and among the most complex, financing: the refinancing of HK$14.8bn and RMB2.17bn secured limited recourse debt due 2012/2017 for GH Water Supply (Holdings) and Guangdong Yue Gang Water Supply Co. The transaction involved: (i) a restructuring of existing credits, which achieved a 76.66% vote in favour by eligible lenders in a two-week period; and (ii) refinancing - onshore PRC/offshore borrowing facilities were signed, comprising (i) HK$2bn and RMB$2.17bn onshore to WaterCo and (ii) HK$12.8bn offshore to WaterCo Holdings, guaranteed by WaterCo

Richards Butler
Advised First Pacific Company Ltd (FPC) - the Hong Kong-based and listed telecoms and food group company incorporated in Bermuda - and the issuer CAB Holdings Ltd, its wholly-owned subsidiary, in the issue of US$115m 8.25% secured bonds due on 2006. Richards Butler lawyers involved included partner Andrew Brown

Shearman & Sterling 
Advised Hutchison Whampoa on the largest US dollar bond offering in Asian history. The deal included two re-openings of the offering, each with different underwriters, and was characterised by rapid pricings and closings in highly uncertain capital markets. The timing and success of this offering was critical to Hutchison's refinancing of its 2003 and 2004 exchangeable bonds. Lawyers included Matthew Bersani in Hong Kong and Larry Crouch in Menlo Park

Slaughter and May
Advised MTR Corporation Ltd (a wholly-owned Cayman Islands subsidiary of MTR Corporation Limited) on its issue of not less than HK$1bn retail bonds, guaranteed by MTR Corporation Ltd. The 23 April 2002 issue was the first Hong Kong-dollar denominated retail bond issued by a Hong Kong-listed company

Allen & Overy
Advised Bank of China International, Goldman Sachs and UBS Warburg - the joint financial advisers - on the US$2.7bn IPO by BOC Hong Kong (Holdings) Ltd and listing on the Main Board of the HKSE. Bank of China is the first state-owned bank of China to be listed outside the mainland of China

Baker & McKenzie
Advised the underwriters, The Hong Kong and Shanghai Banking Corporation Ltd, on the US$110m issue of PRC-H Shares by Hainan Meilan Airport Co Ltd in 2002

Freshfields Bruckhaus Deringer
Advised China Telecom Corporation Ltd on its US$1.51bn global offering and listing of H shares on the HKSE and ADRs on the NYSE. The IPO was initially launched in late October 2002, but due to unfavourable market conditions was downsized with an immediate and successful re-launch in early November 2002. This was the largest dual-listed IPO and largest telecommunications IPO globally for 2002, and was the largest IPO by a PRC incorporated company in 2002. The IPO was also noteworthy because it included a public offering without listing in Japan - the first such offering by an H share company. The Freshfields team was led by partners Teresa Ko and Ng Kay Ian

Herbert Smith
Advised global coordinator ABN AMRO Rothschild and joint bookrunners AAR, Goldman Sachs and ING Bank, as international and US counsel on the Maxis Communications' global IPO on the Kuala Lumpur Stock Exchange. The IPO valued Maxis at over US$3bn. The IPO was Malaysia's first international IPO since the Asia financial crisis and one of the largest IPOs in Asia last year. Veronica O'Shea - corporate partner at Herbert Smith's Singapore office - was assisted by corporate partner Michael Fosh in Hong Kong

Linklaters
Advised Salomon Smith Barney Hong Kong Ltd as sponsor on the spin off and listing in Hong Kong of CK Life Sciences Int'l (Holdings) Inc, one of the most significant biotech IPOs in Hong Kong to date. CKLS is the biotech division of Cheung Kong (Holdings) Ltd (60% Cheung Kong and 40% by the private companies of Li Ka-shing). The share offer was a combination of a public offer in Hong Kong and a placing with certain professional, institutional and other investors, as well as employees of the CKLS group. Shareholders of Cheung Kong were offered assured entitlements in accordance with the Hong Kong listing rules governing spin offs. Linklaters advised on Hong Kong and US law

Richards Butler
Advised Sinotrans Ltd - a PRC company principally engaged in the logistics and transportation business - in the placing and public offer of H shares of the company on the main board of the HKSE and related group reorganisation. The company raised approx HK$4bn in its global offering and is now the third largest IPO globally and, at the time of listing, was the largest IPO globally. Richards Butler lawyers involved included partners Christopher Williams, Delpha Ho, Urania Chan, John Melia, and Yi Ming Syn

Shearman & Sterling
Advised BOC Hong Kong (Holdings) Ltd as issuer, and Bank of China, as selling shareholder, as to US law in the US$2.7bn global offering of the common shares, and ADSs representing its common shares, of BOC Hong Kong (Holdings) Ltd, and the listing of its common shares on the HKSE. This is the first international equity offering by an affiliate of a PRC bank. Lawyers included Jonathan Weld and Hsiao-chiung Li in Hong Kong, Richard Price in Singapore, and Linda Quinn and Dan Newcomb in New York

Slaughter and May
Advised joint global coordinators China International Capital Corporation Ltd, Merrill Lynch Far East Ltd and Morgan Stanley Dean Witter Asia Ltd and the underwriters on the global offering of China Telecom. The global offering of H Shares, raised approx US$1.4bn (prior to the exercise of the over-allotment option) and obtained a dual listing on the HKSE and the NYSE. The global offering comprised a Hong Kong public offering, a US offering and an international offering (including a public offer without listing in Japan)

PROFILE

Hong Kong's capital market - proactively promoted to PRC

With a combination of strong China knowledge, experience of US financial techniques, and the support of the firm's international resources, Heller Ehrman is actively introducing possibilities to PRC enterprises

The first PRC company was listed in Hong Kong in 1987. Since that time the so-called "red chip" has become a common feature of the Hong Kong financial market, and today Chinese companies are the primary users of the Hong Kong capital market. With between 70% and 80% of the market share, Hong Kong is the market of choice for PRC companies going into the outside market.

Explaining the appeal, Heller Ehrman's Simon Luk says: 'China is heavily regulated. Enterprises have to queue to list and become subject to other inefficiencies. This creates room for willing entrepreneurs to go to the Hong Kong capital market, where there's more opportunity for capital fund raising, which can be done at a time convenient to them, and in a foreign currency'.

As the level of business activity in China continues to increase, so do financing requirements, and Heller Ehrman has its eyes firmly set on meeting these needs. The firm opened its Hong Kong office in the late 1970s, becoming one of the first US firms to do so. Since that time it has built up a wealth of local knowledge and experience.

However, the firm's capacity to meet PRC companies' growing needs was strengthened by the recent addition of Carson Wen and his team. Not only was Wen instrumental in listing the first PRC company in Hong Kong, but he is a second-term deputy to the National People's Congress of China.

Already a leader in its work with PRC private enterprises, the team at Heller Ehrman believes the market potential is unlimited. PRC private companies being substantial enough to enter the capital market is only a recent phenomenon and Wen's team has been very much part of this phenomenon. In a proactive stance, Wen is leading initiatives to introduce new financing initiatives to PRC enterprises.
Wen and his team have participated in seminars throughout China to share their restructuring experiences.

'We've built up very good connections both in Hong Kong and China when it comes to presenting financing and restructuring ideas to China,' says Luk.

Heller Ehrman strongly believes corporate restructuring is the first step to building a capital market relationship.

'Restructuring is the mother to everything because if you're not restructured, don't even bother about listing. It does take experience. But we have this experience,' says Wen.

What Heller Ehrman uses this experience to do best is to turn homegrown PRC companies into Cayman Islands or Bermuda held foreign-owned enterprises. Whereas Chinese law restricts stock options and share transferability, by restructuring PRC companies into foreign-owned enterprises listing the Cayman Islands or Bermuda holding companies some of such restrictions can be removed.

Entrepreneurs and stockholders get what they want and shares become tradeable. This creates liquid wealth and is fundamental in fostering the growth of the company. Moreover, with further funding, these companies become better employers and better taxpayers. This has led to the support of government officials for such initiatives.
Heller Ehrman believes capital market promotion is imperative to its strategic growth. 'We promote the Asian capital markets by talking to clients before they realise they need it,' explains Wen.

Once an interest has been created, Heller Ehrman assists PRC enterprises so that upon qualifying their path to listing is facilitated. 'We would like to tap the issuers, the borrowers, people who would raise funds and we represent as many borrowers and issuers as banks,' says Wen.

Heller Ehrman's approach to PRC companies is firmly centred on the owners of enterprise. 'We're trying to bring these new financing tools to the owners and majority shareholders directly,' says Luk.

In doing this Heller Ehrman draws on a profusion of connections with the industrialists and with the borrowers. Armed with a potent blend of expertise, Heller Ehrman is also eyeing large state-owned PRC enterprises. Although these deals have traditionally been the domain of the "magic circle" firms, Heller Ehrman remains undeterred.