Mergers & Acquisitions

China’s lending scrutiny spreads, catching asset buyer Sunac in its wake

China’s banking regulator has ordered commercial banks to check out the developer’s credit exposure, which has been on an aggressive buying spree

PUBLISHED : Tuesday, 18 July, 2017, 1:38pm
UPDATED : Tuesday, 18 July, 2017, 11:37pm

Sun Hongbin, the Shanxi magnate who last week executed China’s largest real estate takeover, has found his Sunac China being caught in the wake of a spreading regulatory scrutiny of Chinese asset buyers, a day after his triumphant election to the board of Leshi Internet Information & Technology Corp.

The China Banking Regulatory Commission verbally ordered commercial banks to examine their credit exposure to Sunac China, according to sources familiar with the matter. The order follows similar instructions delivered verbally on June 20 for banks to look into loans exposures to Wanda Group, which compelled its founder Wang Jianlin to dispose of US$9.3 billion worth of hotels and theme parks last week to Sun.

Sunac is the latest company to be investigated by China’s leaders ahead of a Communist Party reshuffle later this year.

Still, Sun is putting a brave face under the spotlight, saying his company had caught the regulator’s attention because of its huge investment in Wanda. “This is a normal practice by banks,” he said.

The latest development comes after banking sources told the South China Morning Post that the CBRC has ordered banks on June 20 to suspend funding of six major overseas investments by Wanda for breaching restrictions.

In addition, China Construction Bank halted the sale of a Sunac financial product and called off a 1.5 billion yuan trust loan to the company after receiving the regulators’ order to review the company’s credit risks, Chinese news portal Jiemian reported earlier on Tuesday.

Besides Sunac, companies under or related to acquisitive Chinese conglomerates Fosun Group, HNA Group and Wanda have also been included in this round of scrutiny, two banking sources told the Post this morning.

This round of scrutiny is a separate one from the round in early June, the sources said, noting that the purpose should be preventing financial risks stemming from aggressive M&A activities.

China puts Wanda under spotlight, closes off loan options for breaching investment rule

Sunac shares slumped as much as 13 per cent in Hong Kong, the biggest intraday decline since July 2015. The developer’s 2019 US dollar bonds fell US$4.1 cents to US$99.3 cents, the largest drop on record.

“Highly leveraged companies have been under close scrutiny by China’s banking regulator,” said Chen Shujin, chief financial analyst with Hong Kong-based Huatai Financial Holdings. “As the CBRC vowed to fend off financial risks in every aspect.”

Highly leveraged companies have been under close scrutiny by China’s banking regulator
Chen Shujin, Huatai Financial Holdings

Sunac is one of China’s most aggressive and indebted developers.

The deal with Wanda added to a buying spree by Sunac totalling 110 billion yuan (US$16 billion) in the past six months, including a 15 billion yuan capital injection into cash-strapped Chinese technology giant LeEco Group. Following the cash injection, Sunac acquired stakes in three LeEco units, and Sun was elected on Monday to the board of directors of Leshi in Beijing.

The credit check will undoubtedly put pressure on Sunac’s funding, Chen added.

Fitch Ratings has downgraded Sunac Long-Term Foreign-Currency Issuer Default Rating to ‘BB-’ from ‘BB’ last week and put all the ratings on Watch Negative due to the company’s acquisitive business approach, which will make its financial profile more volatile.

Sunac’s net-debt-to-equity ratio surged to 208 per cent at the end of 2016, from 75 per cent in 2015, the second highest among Chinese developers tracked by Morgan Stanley.

Meanwhile, Fosun said it has successfully issued 2 billion yuan (US$295.96 million) in short-term commercial paper in domestic bond market on Tuesday, shrugging off the reports that it was one of the targets of China’s greater scrutiny of financial risks.