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By Elzio Barreto and Denny Thomas
HONG KONG, May 6 (Reuters) - State-owned China GalaxySecurities Co Ltd set a record for Hong Kong's IPO market onMonday, with a total of 21 banks working as joint bookrunners onits $1.37 billion offering.
That smashes the previous record of 17 banks set last yearby state-owned insurer PICC Group for its $3.6 billionIPO - and is a sign of lean times for Asia's once booming stockissuance industry.
The large number of banks involved in the China GalaxySecurities IPO shows just how much companies are calling theshots on bankers in stock and bond sales, and highlights theshrinking revenue pot in Asia for investment banks. The morebanks that are involved in a deal, the smaller the piece of thepie they each get.
"This is a bloodbath. There just isn't enough business inthe market. There's an over-supply of bankers and anunder-supply of clients," said Keith Pogson, Managing Partnerfor Financial Services at Ernst & Young. "All the bargainingpower is with the issuers and not with the banks. This is thenew normal."
The China Galaxy Securities initial public offer comes atthe same time that Sinopec Engineering, part of Asia's largestoil refiner Sinopec, is offering 1.33 billion sharesin a $2.24 billion IPO - a signal that there isstill a pulse in Hong Kong's moribund IPO market. The two dealsshould set the tone for IPO activity in Hong Kong, which toppedglobal rankings for such deals in 2009 and 2010, Thomson Reutersdata shows.
But even if these deals trigger a series of other offerings,the outlook for equity capital market revenues in Asia Pacificremains sober in the current climate.
China Galaxy Securities initially mandated its own ChinaGalaxy International unit, Goldman Sachs and JPMorgan to manage its IPO. In March, it added 13 banks and thelist 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 GalaxySecurities and the Sinopec unit signal a pick-up in activityafter IPO issuance in Asia ex-Japan slumped 56 percent to $3.3billion in January-March, making it the worst start to a year inthe region for new share listings since the first quarter of2009, 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'stotal of $7.72 billion worth of deals was the lowest in volumeterms since the 2008 global financial crisis.
In the 2010 bumper IPO year for Hong Kong, Asia's top threeinvestment banks each earned an average of $289 million inequity-related fee revenue, according to Thomson Reuters datathat excludes Japan and Australia. Last year, that figure fellto just $92 million.
For deal-starved bankers today it's a tough balance betweenbeing on unprofitable deals and keeping clients happy.
"Investment banks are all trying to get league table creditand show something to the head office," said one Hong Kong-basedinvestment banker, who was not authorized to speak publicly onthe matter. "I suspect only half or less are making any realmoney out of it."
The only major investment bank with a strong equitiesbusiness not on the China Galaxy Securities line-up is MorganStanley. Reuters could not confirm whether the New Yorkbank 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 IPOproceeds to expand its margin financing and securities lendingbusiness, and also its securities trading business, agreed topay a base underwriting fee of 2 percent of the IPO proceeds,with an incentive fee of up to 1 percent, Thomson Reuterspublication IFR reported on Monday. That compares to the 2.5percent paid by PICC last year and 1.75 percent AIA Group paid for its $17.8 billion IPO in 2010, which had 11bookrunners.
Banks dedicate entire teams to large-scale IPOs, rangingfrom more junior bankers to managing directors and partners,committing resources that could otherwise be used to win newdeals and boost revenue. The bankers taking part in the ChinaGalaxy Securities process are aware that the hours spent on thedeal may end up costing the bank money.
"We can't afford to do that," said a person involved in theunderwriting, who didn't want to be named because of thesensitivity of the matter. "We've told these guys, this is not acharity."
