1 February 2016
News of slowing economic growth in China, once the motor of the world’s emerging economies, has already given stock markets around the globe a good scare this year. In January the Shanghai stock market dropped a whopping 25 percent, while the Hong Kong, NYSE, Nasdaq, and Nikkei exchanges all saw declines of 10 percent or more before making a partial recovery toward the end of the month.
How spooked are global law firm? The short answer: Not much. Despite the bear market in both Hong Kong and mainland China’s stock markets, partners from nine international law firms with leading China practices say they are generally bullish about their China practices, especially for deals in sectors such as Internet and healthcare. Government policy-driven projects and insolvency matters are also keeping lawyers busy, they say.
But their optimism is not without concern. The largest worry is the capital markets work, especially on the equity side.
Sluggish Capital Markets
The Hong Kong Stock Exchange, where many Chinese companies are seeking listings, is projecting a tough outlook. On Jan. 11, the Hang Seng Index, benchmark for the Hong Kong stock market, fell below 20,000 points for the first time since 2013. Later that month the price-to-book value fell below one—meaning the stocks are now trading below the value of their net assets—for the first time since the 1998 Asian financial crisis.
Ernst & Young forecasts no more than 110 Hong Kong IPOs in 2016; KPMG predicts 100. Last year the Hong Kong bourse saw 138 new listings the Hong Kong bourse saw last year.
“It’s pretty obvious to everyone that equity capital markets will be slow at least in the first half of this year,” says Matthew Bersani, Shearman & Sterling’s Hong Kong-based Asia managing partner.
Lawyers say there is still hope for Hong Kong IPOs, especially in the consumer-facing sectors such as healthcare, education and commercial city banks. Both Ren Zhaoyu, Paul Hastings’ deputy office chair in Hong Kong, and Elaine Lo, Asia chair at Mayer Brown JSM, note that the uncertainty and volatility in the Chinese domestic securities market will result in a larger number of Chinese companies choosing Hong Kong for their IPOs.
A few firms have made lateral hires specializing in Hong Kong IPO work. In January White & Case hired partners Catherine Tsang and Jessica Zhou from Paul Hastings and Milbank, Tweed, Hadley & McCloy, respectively.
At the moment, uncertainty still surrounds this year’s outlook. “Our busiest season is usually from the second quarter till the end of the year,” says Kirkland & Ellis Hong Kong partner Dominic Tsun. He expects that deals might pick up once the Hang Seng Index goes back up to 21,000 to 22,000. (It is at 19,595 at press time.)
“Right now the weather is still a little cold and it needs to warm up a bit,” Tsun says.
Cautious Optimism for M&A
In this climate, mergers and acquisitions deals with a capital markets element will also be tougher to execute, notes Alan Wang, a Shanghai partner with Freshfields Bruckhaus Deringer.
“Clients are more cautious in their approach to deals, and more time is being spent on due diligence,” says Wang. The recent tightening of capital controls by Chinese authorities, he adds, may also mean that outbound deals are subject to closer scrutiny and will therefore take longer to execute.
But Wang says that these hurdles don’t necessarily mean that companies will abandon deals, noting that Freshfields’ pipeline for outbound Chinese deals remain strong. In January, his firm represented state-owned China National Chemical Corp., or ChemChina, on a $1 billion acquisition of German industrial machinery maker KraussMaffei Group. Also last month, China Petrochemical Corp., or Sinopec, advised by Vinson & Elkins, bought a 10 percent stake in Russian petrochemicals company Sibur for $1.34 billion.
M&A work tends to be less directly correlated with economic conditions, says Julie Gao, a Hong Kong-based partner at Skadden, Arps, Slate, Meagher & Flom: “M&As are for various purposes, and if a business wants to achieve certain purpose, it wouldn’t give up just because the economy is not good.”
But Gao says that she doesn’t expect to see as many big-ticket deals between rivals this year as she did in 2015, when Skadden and Davis Polk represented Dianping.com, Chinese version of Yelp, and peer Meituan, respectively, on a $15 billion combination.
“Most of the big ones were already done,” Gao says, adding that she’s still “cautiously optimistic” about this year. “We are pretty busy at the moment. We are getting many enquiries from businesses, investment banks and private equity firms on potential deals.”
Tech and Consumer Businesses Drive Deals
The Chinese Internet sector remains a key source of work for law firms. “Anything direct or indirectly related to e-commerce will continue to grow,” says Tsun.
Gao, a dealmaker known for taking China-based internet companies public on U.S. stock exchanges, spent last year advising some of these companies as they sought to exit the American stock market and return to Asia for higher valuations. In June, she represented the special committee of independent directors at Chinese internet company Qihoo 360 Technology Co. Ltd. on a $9 billion go-private deal by a consortium led by chairman Zhou Hongyi. She also worked on several big mergers between direct competitors in China’s e-commerce sector.
Bersani says that Shearman is currently working on six privatizations by U.S.-listed Chinese companies. Earlier last year, it hired partner Stephanie Tang, a specialist in go-private deals, from Kirkland. The firm is now advising the special committee of Mindray Medical International Ltd., a NYSE-listed Chinese medical equipment maker, on a $3.3 billion privatization.
Shearman is involved in similar deals for Nasdaq-listed matchmaking site Jiayuan.com International Ltd., game developer iDreamSky Technology Ltd. and movie distributor Bona Film Group Ltd.
Not surprisingly, law firms are making more tech sector-related lateral hires. In January, K&L Gates recruited startup and fundraising-focused partner Glenn Cheng in Shanghai. In November, Norton Rose Fulbright hired technology partner Anna Gamvros in Hong Kong, and last summer, Latham & Watkins Shanghai partner Karen Yan left for Fenwick & West.
As China tries to shift from an investment-driven economy to a one powered by consumption, consumer-facing businesses in the healthcare, hospitality and entertainment sectors will become more active, lawyers say.
In November, Wenzhou Kangning Hospital Co., a private psychiatric hospital, retained Kirkland for an $88 million IPO in Hong Kong. In September, Paul Hastings represented a consortium of state-owned Chinese investors on a $7.8 billion deal with Universal Studios to build the production house’s largest ever theme park in Beijing.
State-Owned Enterprises Restructure
Firms are also getting work from more policy-driven deals—some worth billions of dollars— as the Chinese government pushes state-owned enterprises to restructure. In December, Freshfields and Paul Hastings advised China Shipping (Group) Co. and China Ocean Shipping (Group) Co., or COSCO Group, respectively, on a $20 billion assets restructuring.
Freshfields also acted for state-owned Cinda Financial Holdings Co. Ltd. on an $8.8 takeover of Hong Kong-based Nanyang Commercial Bank Ltd. from Bank of China Ltd. The Magic Circle firm also represented China Unicom Ltd. and China Telecom Corp.—alongside Sullivan & Cromwell as counsel for China Mobile Ltd.—on consolidating $36 billion worth of assets into a newly formed company.
Increasingly, such restructuring deals have an offshore component because of the international listings of these companies, says Freshfields’ Wang, and international firms are usually sought for their cross-jurisdictional expertise.
Insolvency Work on the Rise
The U.S. Federal Reserve’s December decision to raise interest rates signaled the end of a decade of loose monetary policy. Chinese companies that have debt denominated in dollars face rising costs and a greater potential risk of default, Mayer Brown’s Lo says. Last year, her firm represented the company and creditors, respectively, in two major defaults by Chinese companies China Shanshui Cement Group Ltd. and developer Kaisa Group Holdings Ltd.
Kirkland which also advised bondholders on the Kaisa defaults, launched a Hong Kong-based insolvency practice a year ago with the hire of former Hogan Lovells heavyweight Neil McDonald, and now has three partners on the team. Paul Hastings’ Ren says that his firm is also looking to expanding its insolvency practice to Asia after hiring restructuring partner David Ereira in London from Linklaters.
Raising Funds for China’s Marshall Plan
The New Silk Road Economic Belt and the 21st-century Maritime Silk Road—also known as the One Belt, One Road initiatives—are another area where international firms expect more work. The initiatives, dubbed as China’s Marshall Plan, aim to provide aid to infrastructure development in 65 countries in Central Asia, Europe, Southeast Asia and Africa.
Lo says that Hong Kong is well-placed for financing for the infrastructure projects under the initiatives. Citing research by the Asia Development Bank, she says the $40 billion Silk Road Fund and the $100 billion capital under the Asian Infrastructure Investment Bank will not be enough for the $8 trillion required for fund all the projects.
“Wherever there is need for fund raising,” says Lo, a veteran finance lawyer, “there is a demand for legal services.”
Reprinted with permission from the February 1, 2016 edition of The Asian Lawyer © 2016 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.