Gearing up

10 September 2004
Attempting to measure the available liquidity for potential initial public offerings (IPOs) is akin to inquiring about the length of a piece of string. Specific deals attract specific responses. However, patterns are beginning to emerge. The IPOs staged in the UAE by Amlak Finance, Finance House and Arabian Technical Construction Company (ATCC) have been 33 times, 78 times and 64 times oversubscribed, with total book building reaching $3,730 million, $2,300 million and $3,800 million respectively.

'The cash thrown at the primary market is enormous,' says Walid Shihabi, head of research at Shuaa Capital. 'But it is important to take a view of how much leverage is involved, how much of the liquidity has been created by profit taking from existing equity positions and how much of the liquidity is deal-specific.'

Certainly, the amount of leverage is significant. For the Industries Qatar (IQ) deal, the local commercial banks were encouraged to extend credit, and bank loans supported a substantial volume of the $1,320 million offered. The trend has been exacerbated in the UAE, with investment bankers saying there was between 70-80 per cent leverage on the ATCC IPO.

In a low interest rate environment there is little to suggest that such patterns will not be repeated. And, as long as markets remain buoyant and IPOs are priced to go, heavy leverage has little inherent danger. The risk comes when interest rates move north while markets go south. Virtuous circles can turn vicious and, as Oman bitterly experienced in the late 1990s, margin lending and bear markets are ugly bedfellows.

Virtual liquidity

Equally, is there a danger that investors could trigger secondary market corrections by waves of profit taking in preparation for the next big IPO? 'In the short term there is no real danger,' says Michael Parkhouse, head of investment banking at Gulf International Bank in Riyadh. 'In Saudi Arabia the next three-five deals shouldn't have much of an impact on overall market liquidity, but it could eventually have an impact, and alternatives such as real estate might be affected.'

Even allowing for leverage, is all the liquidity real? A phenomenon that could be called virtual liquidity is emerging. Driven by the expectation of huge oversubscriptions to IPOs, and the concomitant likelihood of the scaling back of bids, investors have been encouraged to deliberately oversubscribe in the hope of being scaled back to the position size they wanted in the first place.

Talk of primary market bubbles would be horribly premature, but there are a few signs that caution might be lacking.

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