Tuesday28 January 2020 ★ FINANCIAL TIMES 25
M A R K E T S & I N V E ST I N G
DAV I D S H E P PA R D
E N E R GY E D I TO R
Opec and its allies have held prelimi-
nary discussions about making deeper
cutstooilproductionifthefalloutfrom
the coronavirus utbreak keepso
weighing on crude prices, which
slipped to a three-month low below
$60abarrelyesterday.
The so-called Opec+ alliance, which also
includes Russia, has beencutting output
since 2016. The group is now examining
options to halt a renewed price rout,
which has seen Brent slide almost 17 per
cent since hitting a high near $70 a
barrel in early January.
“They are prepared to do anything if
there is a need,” one senior Opec source
told reporters yesterday. “They are
watching the market closely.”
One of the options under discussion is
extending the current agreement on
reduced production, which wasmade ni
early December, until the end of the
year. The Opec+ group is also looking at
potentially “cutting deeper”, the senior
Opec source said, though no decision
has yet been made.
The discussions are the latest evi-
dence that Opec members including
Saudi Arabia, the de facto leader, have
been spooked by the oil price slide,
which accelerated after the coronavirus
hit demand in China, the world’s
second-largest oil consumer.
Saudi Arabia’s energy minister tried
to play down the impact of the coronavi-
rus, releasing a statement shortly before
the market opened on Sunday night.
Brent crude, the international bench-
mark, hit a low of $58.50 a barrel
yesterday, down more than 3 per cent.Crude’s fall comes despite threats to
the supplies in the Middle East. The
majority of Libya’s oil production has
been shut for more than a week by an
export blockade carried out by forces
challenging the UN-backed government
in Tripoli.
Libya’s output has declined in recent
days by more than 1m barrels a day — or
roughly 1 per cent of global demand — to
stand at less than 300,000 barrels a day
with the country’sNational Oil Corpora-
tion orced to close down productionf
due to a lack of storage capacity.
Tamas Varga, an analyst at oil broker-
age PVM in London, said that, while
most traders were betting the outage in
Libya would be relatively shortlived —
as both sides in the conflict are
dependent on oil revenues — a pro-
longed disruption could tip the market
into a small supply deficit.
But the focus remains on the impact
of the coronavirus with traders seem-
ingly more eager to manage that risk.
“The jury is still out whether Opec will
be able to come anywhere close to bal-
ance the market in coming months,” Mr
Varga said. “Further weakness is antici-
pated unless the epidemic is contained.”Commodities
Opec eyes further oil supply cuts to
counter price rout over coronavirus
TO M M Y ST U B B I N GTO NItalian government bonds are rallying
after a defeat for rightwing leader
Matteo Salvini’s party in a key regional
election reassured investors that a
collapse of the country’s ruling
coalitioncanbeaverted.Mr Salvini’s League party failed in its bid
to unseat the centre-left Democratic
party from its stronghold of Emilia-
Romagna over the weekend, removing
the risk of snap national elections.
Investors responded by piling into
Italian government bonds, which had
lagged behind their eurozone counter-
parts in recent weeks.
Reflecting the jump in prices, Italy’s
10-year yield sank 0.2 percentage points
to 1.03 per cent esterday — the lowesty
level in three months. As recently as last
week, the yield was 1.44 per cent.
Theoutcome of the election has
removed a reason to hold back from
Italy’s government debt market, which
is the eurozone’s largest and one of its
highest yielding.
“You have seen a lot of investors wait-
ing on the sidelines for this risk to pass,”
said Mohammed Kazmi, a portfoliomanager at Swiss private bank Union
Bancaire Privée. “Now they are jumping
back in.”
Italian bonds were also buoyed by a
broader rally across government debt
markets as fears over the spread of a
deadlycoronavirus in China drove
investors into safe assets.
German 10-year bond yields, a bench-
mark for eurozone debt, fell to a three-month low of minus 0.4 per cent. But
Italy’s debt also stands to benefit — at
least relative to Germany — on any
return of optimism that pushes inves-
tors towards riskier bonds, according to
fixed income strategists at Rabobank,
who described the situation as “heads I
win, tails you lose”.
Negative yields in other parts of
Europe’s bond markets further add to
the attractiveness of Italian debt, as
does atentative improvement n theioutlook for the region’s economy and
the European Central Bank’s bond pur-
chases under its stimulus programme.
“The valuation argument, a growth
argument and an ECB argument all
make us think Italy can rally further,”
said Mr Kazmi, who favours Italian
bonds in his portfolios.
Some investors caution that Italy’s
politics and debt market will remain
unpredictable.
David Zahn, head of European fixed
income at Franklin Templeton, said:
“We would note that Italian politics has
always been volatile — the government
historically changes every 14 months or
so. In terms of the implications or
impact on broader Europe of these
regional elections in Italy, we think it’s
minimal. We don’t see this regional
election result as a comment on the
direction of politics more generally.”
Greek debt also ralliedyesterday,
pulling 10-year yields to an all-time low
of 1.14 per cent, following an upgrade of
the country’s credit rating by Fitch on
Friday. The rating agency lifted Greece
one notch to BB with a positive outlook.
Athens’ rating is now only two notches
away from investment grade status.Fixed income
Italian debt rallies as local poll setback
for Salvini eases risk of early election
‘The valuation argument, a
growth argument and an
ECB argument all make usthink Italy can rally further’
Libyan oil facilities have been
affected by an export blockadeFastFT
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RYA N M C M O R R OW— LO N D O N
Big investment banks are backing out of
Chinese IPOs on Wall Street as tumbling
valuations and a frosty political climate
force companies tocut the size of their
deals.
Credit Suisse,Citigroup nda Bank of
America re among those that havea
walked away from Chinese companies’
efforts to sell shares in New York in the
past few months.
At least four Chinese companies have
lost the support of sponsoring banks as
their valuations have faltered and
potential fees have fallen, according to
people close to the deals and company
filings.
They includeUcommune, which has
been described as China’s answer to
WeWork, andCanaan, which makes
bitcoin mining technology.
The trend comes as the US has ratch-
eted up scrutiny of Chinese companies’
access to its capital markets, amid
enduring trade tension between Wash-
ington and Beijing.
Last autumn, the Trump administra-
tion considered a ban on Chinese listings
and curbing the ability of US govern-
ment pension funds to buy Chinese
stocks — steps it ultimately backed away
from before signing a phase one agree-
ment with China this month.
Given this backdrop, it is “no surprise
banks are a little worried” on the pricing
of initial public offerings, said Stephen
Chan, a partner at law firm Dechert.
“Bulge bracket banks don’t want to be
involved if the company is just going to
tank,” he added, referring to the largest
investment banks.
In one example, Credit Suisse spent
six months working on the proposed
New York IPO of Chinese drone maker
EHang Holdings, only to step away a few
weeks before the deal priced in Decem-
ber. EHang raised just $40m when
it floated n December after initiallyi
seeking about $100m.
In another, co-working company
Ucommune apped Citigroup, Creditt
Suisse and Bank of America ahead of a
proposed New York IPO.
In October, all three banks were still
engaged but by December they had
dropped off the deal. One banker
described the valuation demanded by
lossmaking Ucommune as “crazy”.
Ucommune is set to list early this year.
Credit Suisse pulled out of the IPO of
Canaan in the run-up to the company’s
New York listing in November. The
company raised about $90m on its
debut, having earlier aimed for more
than four times that sum.Lizhi, a Chinese audio streaming com-
pany, also lost Credit Suisse as its IPO
sponsor prior to its $45m listing in New
York this month after lowering its fund-
raising target.
In total, 10 Chinese start-ups have
pared their fundraising goals since Sep-
tember in order to get a US listing over
the line, according to data from bou-
tique advisory Prime Number Capital.
Wall Street has become a less obliging
venue for Chinese companies seeking to
tap America’s deeper pools of institu-
tional capital and investment banking
prowess.
IPOs of Chinese start-ups in New York
hit $29bn in 2014 — boosted by
Alibaba’s listing in the city — but total
cash raised last year was just $3.6bn,
according to Dealogic. The number of
Chinese companies listing dropped 25
per cent from 2018.
Declining valuations on those deals
have pressed investment banking fees.
The fee pool for the US listings of Chi-
nese companies in 2019 came to $194m,
half 2018’s total and just under 7 percent of total Wall Street IPO fees, accord-
ing to Dealogic data.
One New York-based banker said
that, if an IPO target fell below
$100m, generally only one large bank, if
any, would stay on the listing.
“It becomes difficult to keep the big
underwriter because, if you look at the
economics of the deal, it doesn’t make
any sense,” said the banker at a boutique
advisory firm, adding that a bank’s typi-
cal commission was about 7 per cent of
an IPO’s proceeds.
Canaan and Lizhi’s offerings were
eventually led by Citi, and EHang’s by
Morgan Stanley.
Analysts said the decision to stay on a
deal sometimes came down to whether
the bank saw it as a first step in a longer
relationship, even if IPO fees were
underwhelming. People familiar with
the banks’ thinking said the lenders
would sometimes go ahead with such
listings if they thought it would lead to a
long-term stream of revenues.
Credit Suisse declined to comment on
its role in the Chinese IPOs. Citigroup,
Bank of America and Morgan Stanley
also declined to comment.
Smaller advisers have stepped in to
fill the place of international banks that
have bowed out of such deals.
Tiger Brokers, an online broker that
allows Chinese investors to trade inter-
national stocks,helped ring EHang tob
the New York market last month.
However, the lack of a big-name spon-
sor can make it harder to launch a
successful IPO, bankers said.
But Chinese companies “need the
capital”, said Benjamin Quinlan, chief
executive of Hong Kong-based financial
services consultant Quinlan & Associ-
ates. “They can’t wait around for a US
bank to say ‘yay’ or ‘nay’.”
Additional reporting by Hudson LockettFalling valuations and trade
war to blame as lenders back
out of companies’ listings
‘Bulge
bracketbanks don’t
want to beinvolved if
the companyis just going
to tank’Drone maker
EHang Holdings
raised just
$40m in its IPO
after seeking
about $100m
Qilai Shen/BloombergEquities. eopolitical tensionG
Big investment banks cool
on China’s Wall Street IPOs
R I C H A R D H E N D E R S O N— N E W YO R KLucky dip deals are back in a big way on
Wall Street. Shell companies that go
public to make acquisitions have
amassed $600m over the past couple of
weeks, continuing a scorching pace that
saw a record sum raised last year.
So-called “special purpose acquisition
vehicles”, orSpacs, raise cash from
investors on the basis that managers
will then go out and try to find a com-
pany to buy, or return the money after a
certain date if they are unable to do so.
Last year, Spacs raised a record
$13.4bn in the US, according to Dealogic
data, a quarter more than theprevious
year and a level that eclipses the former
high water mark set in 2007, just ahead
of the global financial meltdown.
Proceeds raised this year are spread
across two deals.The Gores Group, a
private equity firm, raised $400m in the
company’sfourth Spac.
The second, calledSCVX, has the sup-
port ofHudson Bay Capital Manage-
ment, the New York hedge fund, and
will take aim at deals in the cyber
security sector.
The amounts raised have increased
the pot of cash looking for acquisitions.
Spacs currently have $16.6bn on their
books that has not yet been deployed.
This adds to the $1.45tn in “dry powder”
— committed capital that has not yetbeen invested — within private equity
funds, according to Preqin data.
“The number of outstanding Spacs
and proceeds right now is quite signifi-
cant,” said Jim Cooney, head of equity
capital markets for the Americas at
Bank of America. “The Spacs are under... pressure to invest those proceeds in
a timely but responsible fashion.”
Being bought by a Spac can be attrac-
tive to some companies, which may
want to go public but do not relish doing
an initial public offering on their own.
Two weeks ago,Far Point, the first
Spac offering yb Dan Loeb, the hedge
fund investor, andThomas Farley, the
former New York Stock Exchange presi-
dent, agreed to merge with Global Blue,
a Swiss payments provider.
The company was previously owned
bySilver Lake nda Partners Group, two
private equity firms. The Far Point deal
values the combined group at $2.6bn.
In September,Vivint Smart Home, a
company backed byBlackstone, the pri-
vate equity firm, agreed to merge with
Mosaic Acquisition Corp, a Spac from
Fortress Investment Group, an arm of
SoftBank. The deal valued the com-
bined group at $5.6bn.
In another noteworthy deal last year,
a Spac launched byChamath Pali-
hapitiya, a former Facebook executive,
merged withVirgin Galactic.
The Spac had raised $1.5bn in 2017
but sat idle for two years before combin-
ing withRichard Branson’s space-flight
group.
Asset management
‘Lucky dip’
deals boom as
investors back
shell groups
‘The Spacs are under
... pressure to invest
those proceeds in a timely
but responsible fashion’
Chinese companies lose their lustre on Wall Street
Net fees paid to banks for initial public o erings ( bn)Source: Dealogic Chinese companiesOther companiesJANUARY 28 2020 Section:Markets Time: 1/202027/ - 19:20 User:stephen.smith Page Name:MARKETS1, Part,Page,Edition:LON , 25, 1