Bond sales ready China Inc for more acquisitions after Smithfield Foods
For investors seeking signs of whether Chinese companies will accelerate overseas takeovers, the bond market offers clues.
Firms from China Petroleum & Chemical Corp to China Huaneng sold a record US$22.8 billion of US-dollar-denominated notes in the second quarter, before interest rate jitters froze the market. With bank lending tightening in China and the economy cooling, the money raised with US dollar bonds offers companies another way to finance overseas takeovers.
"The companies that utilised the window to raise cheap funds in the first half are obviously in a better position to pursue [mergers and acquisitions] deals in the near future," said Bob Partridge, a Hong Kong-based managing director who oversees China transaction advisory at Ernst & Young. "As soon as opportunities crop up, they will be able to pull the trigger with ready cash."
The US dollar bond market for Chinese companies seized up early last month, as Beijing tightened liquidity and Federal Reserve chairman Ben Bernanke signalled an end to stimulus measures by the US central bank.
US dollar bond sales used to be the domain of a few state-run enterprises and domestically focused real estate developers, while most Chinese companies mainly relied on bank loans for takeovers.
That changed as yield premiums on US dollar bonds versus treasuries reached a three-year low in January. The yuan's 1.6 per cent gain against the dollar this year also made bond sales denominated in the greenback more attractive.
In at least US$4.7 billion of the total bond sales in the quarter, acquisitions were specified as a use of proceeds. That compares with at least US$3 billion in the year-earlier quarter, according to a search of marketing materials, statements to the Hong Kong stock exchange and ratings company reports. A further US$4 billion was raised in the most recent quarter to refinance debt stemming from takeovers.
"With this new avenue of financing, Chinese companies are better positioned to pursue investment opportunities abroad," said Fang Fang, JP Morgan Chase's head of investment banking in China, whose bank helped CNOOC sell US$4 billion of US dollar bonds in May.
Chinese overseas acquisitions could use a boost. Companies made US$28.3 billion of deals abroad in the first half, about equal to the year-earlier period. That includes Shuanghui International's agreement to pay about US$7 billion, including debt, for pork producer Smithfield Foods, in the biggest Chinese takeover of a US company.