Chinese companies have completed only US$1.1bn of merger-and-acquisitions loans so far this year, as government efforts to curb capital outflows and “irrational” overseas takeovers have taken a toll on event-driven lending, Thomson Reuters LPC data shows.
This year’s tally consists of only two relatively small loans, in sharp contrast to the first quarter of 2016, when 15 facilities totaling US$12.3bn were completed.
One of the 2017 loans is a US$800m five-year facility for a Chinese consortium’s US$2.75bn purchase of Netherlands-based chip maker NXP Semiconductors. The other is a US$282m five-year financing for state-owned food processing holding company Cofco’s [CNCOF.UL] buyout of Dutch grain trader Nidera.
“Our deal flow has been limited and the loans we are working on are rather small as the regulators are strictly screening overseas acquisitions,” a senior M&A loan banker at a Chinese commercial bank said.
The extra scrutiny is lengthening the time it takes for M&A deals and the loans backing them to close, bankers say.
In the whole of last year, Chinese companies borrowed US$39.1bn through acquisition loans supporting 21 deals, helping fund a record US$222bn of outbound M&A deals as the borrowers doubled down on overseas expansion to offset the effect of renminbi depreciation.
China’s State Administration of Foreign Exchange started vetting bank transfers of US$5m or more last November and increased its scrutiny of outbound acquisitions to stop capital flight.
The clampdown has been effective. In the first quarter of 2017, Chinese companies announced US$21.6bn of outbound acquisitions, roughly a quarter of the US$85.7bn total seen a year earlier.
Banks are now more cautious about providing commitment letters for loans backing outbound M&A deals because there is a high risk that domestic regulatory clearance will be refused.
Earlier this year, China National Chemical Corp (ChemChina) [CNNCC.UL] obtained lenders’ consent to postpone a deadline to register as a guarantor with SAFE on a US$12.7bn recourse loan backing its US$43bn acquisition of Swiss pesticides and seeds group Syngenta.(SYNN.S) China Citic Bank is the global coordinator and underwriter on the deal signed last September 2016.
Parent company guarantees are used to enhance credits when Chinese companies raise offshore M&A financing through offshore-incorporated special purpose vehicles or shell companies, as mainland-based parents are closer to revenues.
However, securing parent-company guarantees for M&A loans is getting harder, as SAFE reviews them more strictly, bankers and lawyers said.
“The registration is more like an approval now and the process is slowing,” a Beijing-based senior loan banker said.
NOT ENTIRELY CLOSED
State-owned companies are finding it easier to register as guarantors for offshore loans due to their closer ties with the government, but the door is not entirely closed for others, some bankers said.
“We are currently working with state-owned companies and privately owned companies, all have successfully completed the registrations. They are not banning all the deals,” a Hong Kong-based leveraged finance banker said.
One M&A loan currently in the market is a €980m (US$1bn) facility led by Bank of China backing the £1.4bn (US$1.7bn) purchase of online travel search company Skyscanner Holdings by Ctrip.com (CTRP.O), China’s biggest online travel company, which was announced last November.
Other Hong Kong-based bankers and lawyers are expecting to see a healthy pipeline of Chinese event-driven loans despite the restrictions.
“As the capital controls have made it difficult for Chinese companies with primarily domestic sources of revenues to transfer funds overseas, many of these companies have turned to offshore borrowings to support outbound acquisitions,” said Lewis Wong, head of North Asia in Credit Suisse’s APAC financing group.
Acquisitions that require large amounts of foreign exchange to be transferred offshore, investments outside buyers’ primary business areas and real-estate investments are most at risk, according to a report by law firm White & Case.
Transactions by over-leveraged companies or entities that rely heavily on domestic debt financing, take-private deals of Chinese companies listed on overseas exchanges, and investments by limited partnerships are also at risk.
Source: Reuters.com