Offshore buying spree sparks boom in loans
As mainland companies embark on a spate of acquisitions, global banks are positioning themselves for a slice of the lending market
Mainland firms are in the middle of an offshore acquisition binge, which is pushing up syndicated loan volumes.
Issuers including entities incorporated in Hong Kong have taken on US$25.6 billion in loans for acquisitions in the year to date, according to Thomson Reuters. That is twice the amount seen for all of last year, previously the peak year.
Mainland loans represent about half of all merger and acquisition loans in the Asia-Pacific, excluding Japan. In the past, Chinese firms would account for only 3 or 4 per cent while Australian and Indian firms were much more active. Bankers expect this trend to accelerate next year.
"For many years, the China offshore loan market did not matter. But with this M&A activity, with companies diversifying their financing with offshore capital raisings via loans and bonds, this is the year the market has come of age," said Amit Khattar, Deutsche Bank's Asian head of loan capital markets and syndications.
The business is a major boon to banks. Institutions that offer acquisition loans position themselves for a batch of lucrative ancillary work, such as arranging the bond that will take out the loan, perhaps an initial public offering, and performing all the treasury and trade services the enlarged firm will require.
Investment banks typically are not keen on loan markets' low margins, particularly given that the business ties up so much of their capital.
But they are pitching for acquisition loans, because they see a merger and acquisition as a major event in a company's life cycle, when many Chinese firms acquire international branding and scale. They get involved in the loan that funds the acquisition to cement their relationship with the management just as a company is getting huge.
"International banks that get involved in M&A loans in China also look at ancillary business. It could be more M&As, a bond to take out the loan, an IPO or just trade finance. And if you are acquiring a firm for billions of dollars, then the [chief executive] and [chief financial officer] would be involved in the financing, and you could form a relationship that leads to more business," said Ashish Sharma, the head of Asia-Pacific loan syndication at Credit Suisse.
Among the key M&A loans this year, Alibaba borrowed US$8 billion to help fund the purchase of part of Yahoo's stake in the firm, energy giant CNOOC took a US$6 billion bridge loan to buy the Canadian liquefied natural gas firm Nexen, and Shuanghui is close to finalising a US$4 billion loan to fund its acquisition of Smithfield, the biggest US pork producer.
Offshore acquisitions from China are taking off partly because there is a political imperative. Beijing wants its state-owned firms to acquire strategic assets offshore.
This has been particularly true for energy firms, such as CNOOC and Sinopec, which seem to be announcing a fresh acquisition each month, typically involving access to a new oil field, tar pit or gas bed that deepens China's energy supply.
More recently, China's privately owned firms have acquired assets onshore, often targeting luxury consumption entities.
"The first wave of China M&As focused on resources, whether that was energy or food. The resources wave continues and has now been joined by consumer businesses," said John Corrin, a global head of loan syndications at ANZ.
Examples include Dalian Wanda's acquisition of the US cinema chain AMC last year for US$2.6 billion and Shandong Heavy's purchase of luxury boatmaker Ferretti in January for €374 million (HK$3.9 billion).
There is also a cash dynamic. Mainland firms are stockpiling profits and see Western companies, many devalued by six years of recession or low growth in their home countries, as bargains.
Loan bankers say they like Chinese acquisition loans partly because the implicit state backing for the deal means the acquisition will go through. This is different from many other buyout scenarios, where bankers may work for months on a financing only to see the deal fall through because of blocking tactics from the target firm or because of a richer bid from a rival.
"If it's a state-owned enterprise going in for an overseas acquisition, it's likely been vetted and it's not going to be a hostile acquisition. Before it becomes public, they [the company and the authorities] would have tied up 80 to 90 per cent of the loose ends. That gives a lot of comfort to the banks looking to fund the acquisition," said Aditya Agarwal, the Asia-Pacific head of loan markets at Royal Bank of Scotland.
Offshore banks have also become more comfortable with mainland firms' use of offshore vehicles to make unsecured loans.
Capital controls prohibit mainland firms from borrowing directly offshore. They must go through an offshore vehicle and are prohibited from pledging onshore assets against that debt.
The typical way to handle this is to pledge shares in the offshore vehicle, which may be a Hong Kong-listed subsidiary. Syndicated loan bankers are a conservative lot and are generally uncomfortable making multibillion-dollar unsecured loans to offshore vehicles - but this is changing.
"You are subordinated to debt onshore, which used to be a massive issue, but as experience built up, the structures have become more familiar, and this gets stress tested through the crisis," said Khattar.
Meanwhile, Taiwanese banks have become highly active in such deals. There are about 40 banks in Taiwan that are active in loan syndications, and they are emerging as a big supplier of capital to mainland firms.
Taiwan banks increased their involvement in mainland loans following the June 2010 signing of the cross-strait economic co-operation framework, which opened up access to the mainland market.
"After that, the Taiwan banks became more aggressive on loans in [mainland] China," Sharma said.
It points to a general state of play now, which is more acquisition loans are meeting robust liquidity from global banks - more demand and much more supply.