Global Banking Giants Grow Wary Of China IPOs In US

Global banking giants have grown more wary of underwriting initial public offerings by Chinese companies in the U.S., concerned about rising reputational risks after a string of disappointing deals.

The heightened scrutiny augurs a harder sell for Chinese firms once the market overcomes the current tumult. Even before the rout in equities that began last month, 26 of the 33 Chinese companies that went public in the U.S. during 2019 were trading at less than their offer prices, according to data compiled by Bloomberg.

That’s one of a number of concerns among market participants. Geopolitical strains between the U.S. and China, particularly in technology, continue to pose a challenge — the January trade deal notwithstanding. A push in Washington to consider measures to reduce American capital flowing to Chinese securities adds to the political element. Along with limited institutional investor demand for some names, it all means the hurdles may be too high for smaller deals that lack transparent financial backgrounds.

“Major investment bank interest in China’s offshore IPOs has been dropping,” said Brock Silvers, a managing director at Adamas Asset Management in Hong Kong. “Given overhanging risks and lessened opportunities for profit, banks have begun to rethink participation.”

Among recent deals that saw global banks walking away:

• Morgan Stanley discontinued work on the IPO of online insurance platform Huize Holding Ltd. this February, corporate filings show.
• Credit Suisse Group AG dropped off the IPOs of Bitcoin mining equipment maker Canaan Inc., drone maker EHang Holdings Ltd. and Xiaomi-backed podcast app Lizhi Inc., filings show.
• Credit Suisse, Citigroup Inc. and Bank of America Corp. dropped off the planned IPO of Ucommune Group Holdings Ltd. — China’s largest rival to WeWork — late last year, according to people familiar with the matter then.

The Chinese IPOs in the U.S. last year posted an average decline of 21%. Deal sizes were cut in 14 of the 33, Bloomberg-compiled data show.

There’s by no means a wholesale retreat by Wall Street from Chinese listings, and it’s not unusual to see lenders pull out of individual transactions — or even a whole sector of issuers, such as with peer-to-peer credit providers early last year. But the recent moves are notable, market participants say.

“The current environment has dampened enthusiasm,” Stephen Peepels, head of U.S. securities for the Asia-Pacific region at law firm Hogan Lovells, said of increasing U.S.-China strains. “If they’re not confident that they can deliver good performance on the IPO price” then big banks would rather avoid having their investor clients involved, he said.

Another dynamic that’s sown concern among some bankers is the murky provenance of investors on some deals — a so-called “friends and family” cohort that helps pump up order books, potentially beyond true levels of market demand. Parallel practices have spurred angst in China’s bond market.

“Sometimes the Chinese network is very strong and sometimes they may get suppliers or customers to buy their shares,” said Ringo Choi, the Asia-Pacific IPO Leader at Ernst & Young Global Ltd. in Hong Kong. “Banks may become concerned if they cannot do proper diligence on the investors or if some shareholders become too influential.”

It’s not a factor that banks discuss publicly, as they seek work on bigger offshore IPOs and indeed look to build a business in China’s domestic market, newly opening up to overseas underwriters.

International banks have been walking away from some smaller IPOs because the risks of getting involved in these deals can be greater than the reward, said a person familiar with the matter who asked not to be named.

Credit Suisse stopped work on EHang and Canaan listings after its experience with 36Kr Holdings Inc. in November. After a $20 million IPO, 36Kr tumbled more than 60% from its offer price — even after the size of the offering was slashed by almost two-thirds and it was priced at the bottom of the range marketed.

In December, China’s largest rival to WeWork, Ucommune, lost three international banks that had been working on its planned U.S. listing. Credit Suisse, Citigroup and Bank of America dropped off the IPO, people familiar with the matter said at the time. Citi and Bank of America both declined to comment.

With stock markets increasingly volatile, market conditions elevate the risks for underwriters concerned about any post-IPO slumps.

“If you go through the whole process and at the end of the day it doesn’t happen, first of all there are a lot of costs involved,” said Stephen Chan, a partner at law firm Dechert LLP in Hong Kong. “And also it’s a reputational issue if you can’t bring a deal to life.”

Bloomberg