Global financial turmoil set to rein in regional IPO market

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15 October 2008
Regional IPOs have maintained their momentum despite tough market conditions this year, but that could change. The regional IPO pipeline could run dry in the remainder of the year as the global financial crisis takes its toll on regional markets.

"Saudi companies are still eager to go public, but what may happen is that the could take a few steps back as they would like to see some market order," said Imad Mansour, head of corporate investment banking at Sambacapital, adding that since the Chemanol IPO, the has withheld announcements of new transactions.

Indeed, the Securities Listing Committee at the has suggested suspending all IPOs in Saudi Arabia until there is some sense of stability in the Tadawul, according to a media report.

Given the liquidity crunch in the region, the thinks that "IPOs in Saudi had the tendency to draw liquidity away from the market as investors, looking for a quick profit, liquidate their stocks soon after the company lists. This in turn causes greater volatility on the bourse, hampering serious investors from judging where the market is going. Therefore, it believed new listings on the Tadawul should be suspended until investor confidence can be returned, with public funds set up to manage new offerings," the report noted.

The Saudi IPO market may not be the only one affected - other prolific IPO markets in the region will likely suffer too, at least in the short-term. "The IPO market may not be effected for too long by international financial crisis as it is more dependent on domestic investors, but companies will less likely to IPO because of regional market conditions," said Fadi Al Said, head of ME equity for ING Investment Management. "There is a definite risk aversion as people are running away from risky assets - especially equities."

The regional IPO market has had a golden run this year, with 50 companies raising more than $13.1bn (Dh48bn). Last year, 71 companies raised $14.42bn in the region, according to the Zawya IPO Monitor. In fact, the regional market was one of the world's bright spots in the third quarter.

Thirteen regional IPOs raised $3.82bn in the quarter, compared to 12 IPOs raising $1.60bn in the same quarter last year. In comparison, Europe's IPO proceeds stood at $1.4bn, and the United States a mere $930.6 million, according to a report.

The IPO market may also navigate through the liquidity crunch that has hit regional markets. "Banks will be selective on what they finance, but IPO financing has been a profitable business for banks. It is short-term and seen as low-risk financing, which banks like. , and are some of the major IPOs set to float in the last quarter of the year.

Sambacapital leads the way
Despite the possible disruption, Sambacapital's own pipeline looks strong for now. "We have 11 IPOs in the pipeline," said Imad Mansour, head of corporate investment banking at Sambacapital. "We don't have anything imminent till Q1 2009, but none of the IPOs that we are managing are delayed or cancelled. It takes a company 9-12 months to prepare for an IPO so many have started that journey already, and they are not going to stop in the middle of it."

Mansour expects international banks to get more aggressive in the region as their revenues shrink in their home turfs of Europe and the US.

"International banks definitely have a lot on their plates, but they have regional management structure which has to justify its existence - they have hired people, made investments and now it is time to deliver - and also justify that the business model does work."

That could reduce underwriting fees charged by banks as they try to edge out Sambacapital from its position as the top lead manager in the region. Sambacapital has raised $5.7bn in four IPOs to date and is unlikely to be displaced from its pole position as there are few big-ticket IPOs expected in the last quarter. Last year, Sambacapital was also the region's top lead manager last year as well, clocking $3.67bn for 3 IPOs.

Many competitors argue that Sambacapital's dominance is largely due to its aggressive pricing strategy. "This is totally and completely untrue," counters Mansour. "We are 30 above our 2008 target for fees and 70 above our revenues from the ECM business in 2007. In fact, we recently lost a client to JP Morgan as the client told us our fee was three times more than theirs. "But Mansour expects margins to get squeezed further. "The trend has been very clear over the past six to nine months-there is a huge pressure on fees. All our new deals are not as lucrative as previous ones."

Amman offerings undersubcribed
The IPO rush has ended, at least in the . One of the Middle East's most prolific exchanges with 13 offerings this year, saw two IPOs undersubscribed last month.

Amoun International For Diversified Investments Company's $16.4m IPO was only 31 per cent covered. Investors subscribed to 3.63 million shares out of 11.6 million shares offered according to lead manager, Investment House for Financial Services.

Meanwhile, was covered only 46 per cent as global market jitters reached Amman. Investors subscribed to around 3.22 million shares out of the seven million offered, according to International Brokerage and Financial Markets, the lead manager.

"The Amman market has not been performing well since end of June and that has impacted investor sentiment," said Tanya Khammash, head of research at Amman-based ABC Investments.

"Of course, the international global crisis also suggests that international fund managers may have liquidated their funds and that hurt the market too."

Khammash does not expect any new IPOs coming to the Amman market this year, given market conditions.

That marks the end of an IPO rally which had seen 13 companies raising $125m on this year.

Voicing concerns over Viva
Kuwaiti MP Daifallah Bouramiya has held Minister of Commerce and Industry and State Minister for National Assembly Affairs Ahmed Baqer responsible for the alleged irregularities in subscription procedures for Viva, the country's third telecommunications company. Speaking to Kuwaiti newspaper Arab Times, Bouramiya claimed subscription forms were hidden on purpose and were not available in the banks - a move allegedly aimed at limiting the number of participants in favour of big traders.

"It is a disaster if Baqer is not aware of these irregularities because he is in charge of the , which intentionally hid the forms from participants, but in case he knows, we will be facing bigger problems," Bouramiya told Arab Times.

Meanwhile, the company which is reported to be 150 per cent oversubscribed expects to allocate shares by the first week of October. Viva Chief Executive Officer Najeeb Al Awadi expects company to attract 300,000 subscribers - or 10 of the mobile market in Kuwait - in the first year of its operations, due to start in late 2008.

Vodafone QatarVodafone Qatar speeds up
, which has won both the country's second fixed-line licence and also the second mobile licence is going through its registration process with entities such as Qatar Financial Markets Authority (QFMA), the Doha Securities Market (DSM and the Ministry of Economy as it prepares for its share issue.

Company officials are unwilling to give a specific date for the IPO, although it is expected to be before the November deadline set by ictQATAR.

Damascus dawn delayed
Damascus Stock Exchange, which was expected to reopen for business after decades by the end of the year, has seen its launch pushed back to the first quarter of 2009. "We have been promised that the exchange will be up and running in the first quarter of 2009. We have been told that they will start testing the systems in February," Omar Alghraoui, Chief Operating Officer, at Bemo Saudi Fransi Finance, told Zawya.

The delay has not curtailed IPO business in Syria. Bemo is lead managing the $9.85mn IPO of Bank Al Sharq and has two more IPOs in the pipeline - Amman Takaful Insurance, which is part of Amman Dubai, and Noor Takaful Insurance. Bank Al Sharq, which is under formation, will offer 512,500 shares for sale at SYP1,000 each, or 20.5 per cent of the bank. The remaining 79.5 per cent of the bank's capital is held by Lebanon's Banque Libano-Francaise and Syrian businessmen. The IPO will take place from October 7 to 29, according to Alghraoui.

However, the exchange's delayed launch will not impact on the IPO as the company shares will be traded over the counter, once the IPO is subscribed and share registration formalities completed by the Syrian Commission On Financial Markets and Securities (SCFMS) and the Syrian Central Bank.

While some banks are disappointed that the exchange will not open its doors this year, things are moving at the SCFMS. In August, the regulator issued rules governing listing conditions for the exchange. It also included a code of professional conduct, the bourse's financial and internal regulations as well as regulations governing depository and clearing. According to Alghraoui, there are 47 registered shareholding companies, but he expects only 20-25 to be eventually listed on the exchange as not all meet the new criteria set by the SCFMS.

According to Zawya IPO research, Fransabank Syria and Bank of Jordan-Syria floated IPOs this year. Other companies expected to go public, include Noor Islamic Bank-Syria and Qatar National Bank-Syria.

Complete and listed
Kuwaiti telecom giant Zain's right issue was subscribed 99 per cent to raise $4.5bn. It was the largest subscription in Kuwait's history, according to lead manager National Bank of Kuwait (NBK). "The remarkable success of the largest capital increase in the history of Kuwait, despite the recent gloomy situation dominating the local market, in addition to the decline in local liquidity and the unfavourable psychological circumstances of traders, is undoubtedly an unanimous vote of confidence in Zain's performance, management team, and ambitious expansions in different parts of the world," said NBK's Deputy Chief Executive Shaikha Khalid Al Bahar.

Two companies listed on regional markets in September. United Group Holdings in Jordan, listed on 14 September after being oversubscribed 3.58 times. But the stock lost eight per cent of its value on its debut amid grim market conditions. Saudi Arabia's Methanol Chemicals Company had a far more positive first day, rising 16.67 per cent on its first day of listing. The company was oversubscribed more than six times.

Kuwait's Wataniya Airways will list its shares on the in the first week of November, according to Kuwait's Al Qabas. The new carrier will launch flights to Dubai and Bahrain when it takes delivery of its first aircraft in in January next year.

- The author is the Managing Editor of Zawya.com

By Yadullah Ijtehadi

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