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What’s driving deal-making in Asia Pacific?

Elaine Tan
Elaine Tan
Senior Analyst, Deals Intelligence

Deal-making trends in Asia Pacific during Q3 2020 were focused on the impact of COVID-19 on M&A, the resurgence in debt capital markets, and potential credit stress in high-yield markets.

  1. Deal-making trends in Q3 saw investment banking fees in Asia Pacific overtake Europe to become the second largest market in the world, after the U.S.
  2. Following a lull caused by COVID-19, M&A in the region increased during July. However, Chinese deal-making in M&A has shifted towards a domestic focus.
  3. Pandemic-driven Asian primary debt issuance rose to a record $2.4tn to end of September. Governments and multilateral banks have taken advantage of ultra-low cost, ultra-long dated funding, helping to increase deal-making in the region.

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Asia Pacific investment banking fees eclipsed Europe for the first time in the third quarter of 2020, taking $21bn of a total $91bn global fee haul, and placing it second only to the U.S.

Fee income was driven by an almost doubling in equity business and a 14 percent rise in bonds, offsetting lackluster loan and M&A markets. Indeed, in Asia Pacific (excluding Japan), March was the only down-month this year, while the summer months of July, August and September each set all-time monthly records.

The rise in fees has been driven by China, which convincingly dominates the region’s capital markets.

Year-to-date, Chinese fees have risen 35 percent to reach $15bn. By contrast, neighboring countries have flat-lined at best. Australian fees generated 6 percent more than last year, but Japan showed negligible growth. India, Singapore and the rest of South East Asia registered 20 percent-plus declines.

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Deal-making takes time during Q3

While the M&A year began robustly, pandemic-related uncertainty has hit completion rates, with mega-deals globally now taking an average of 276 days from announcement to completion. It hasn’t taken that long to get a deal over the line since 2002. And Asia Pacific is no exception; deals of more than $3bn have taken 221 days to complete.

Listen to our on-demand webinar: Deal Making in Uncertain Times – A Deep Dive into Asia Pacific

When concerns around the pandemic gradually receded in Asia over the summer, July M&A activity surged. This helped the value of announced transactions involving Asia Pacific companies (excluding Japan) to reach $679.6 billion by the end of Q3; up 6 percent on 2019. Of this, $407.2 billion was China related, a year-on-year increase of one-third.

July to September also saw an all-time high for mega deals involving Asia Pacific including Japan, with announced deals totaling $198bn, with Japan accounting for 59 percent of the mega deal value in Q3..

Japan also continues to surpass China in outbound M&A, to take third place globally (after the U.S. and the UK).

The Chinese mid-decade outbound story is rapidly fading into history. Chinese acquisitions of foreign targets hit their lowest level in more than a decade. Trade wars, growing protectionism, and increased political scrutiny and intervention have pushed more Chinese activity into the domestic sphere.

Much of this internal activity amounts to large-scale consolidation, particularly within the energy and power sector. For instance, the $49bn acquisition of PetroChina Co’s pipeline assets is the largest on record for the region.

Meanwhile, private equity-backed M&A in Asia totaled $87bn in the year to Q3, an increase of 51 percent by value and 35 percent by number of deals in the year to-date. This is the highest level since records began in 1980, as buy-out firms put their vast stockpiles of illiquid capital to work in an increasingly distressed — or at least operationally challenged — corporate environment.

If the economic picture turns sour in the region, this is one corner of the market in a position to take advantage.

Debt capital markets on the rise

Meanwhile, Asia’s debt capital markets also saw a mid-summer resurgence, after a troubled second quarter, with credit spreads plummeting since the height of fear in March.

Primary bond offerings from Asia Pacific-domiciled issuers hit an all-time high during the first nine months of 2020, to $2.4 trillion, up more than one-fifth year-on-year. In addition, recent liberalization of China’s onshore bond market has seen a number of major global institutions setting up onshore subsidiaries. As a result, increased money has flown into the RMB bond market, further driving issuance.

Demand has been driven by COVID-19, with governments and multilateral banks taking advantage of the chance to lock in ultra-low cost, ultra-long dated funding.

There have also been a growing number of deals around social and sustainable debt. For instance, Korean banks have labelled their financings as ‘COVID-19 response bonds’. Sustainability bonds, which include social bonds as well as green bonds, doubled 2019’s full-year total in the first half of 2020.

The story in high-yield markets

High yield markets were also resurgent in Q3, however markets are becoming increasingly leery of credit stress, with Chinese real estate developer Evergrande spooking markets with rumors that it faced a cash crunch. The company’s name is synonymous with private home ownership in China.

Asian equity capital markets saw a record high of $267bn worth of proceeds for the first nine months of 2020, up 74 percent. Chinese reforms that allow companies to raise money without having to sit through months or years long approval processes helped China’s equity issuance market grow 94 percent to take $173bn.

The runaway success of the Shanghai Star Board has seen several high-profile IPO successes, and has even attracted ANT Group’s $35bn IPO which would have been the world’s largest ever.

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