Chinese banks are set to be one of the major financing channels for regional merger and acquisition (M&A) activity in Asia as Mainland companies continue to expand their overseas presence in a big way in 2013.
According to M&A and syndicate specialists, Chinese banks have overshadowed non-China lenders in 2012 loan syndication on deals involving Mainland companies, which account for a sizable amount of business - and 2013 will be the same.
“As long as there’s a link to China – if it’s a Chinese company expanding abroad or a foreign company looking to merge with a Chinese brand – it will be banks like [China Development Bank] CDB’s objective to finance that deal,” said Ali Abbas Alam, Asia co-head of emerging markets financing for Credit Suisse.
“CDB has been extending massive balance sheet to deals – larger than European banks were able to do at the height of their lending businesses years ago,” he said. “It’s capturing deals and writing multi-billion-dollar checks, knocking the other syndicate lenders out…It seems they have the balance sheet to continue doing this next year, and it will make syndicate lending difficult for other banks to compete with.”
The massive balance sheets of state-backed banks including CDB and Bank of China have enabled these institutions to win some of the biggest deals of 2012.
For CDB in particular, this included extending a US$2 billion three- and four-year loans to Alibaba Group to privatise its business-to-business operations, lending to Thailand’s Charoen Pokphand Group to acquire HSBC’s 15.57% stake in Ping An group for HK$72.74 billion (US$9.38 billion), providing a US$600 million four-year loan to Indonesian coalminer Bumi Resources for refinancing in February, extending a US$1.8 billion three-year bilateral loan to Hong Kong Exchanges and Clearing (HKeX) in June to buy London Metals Exchange, and offering a loan to Bright Food to purchase UK-based Weetabix in May.
“CDB is extending such large-sized loans – and so many of them – that are much larger than what European banks were able to complete in the pre-crisis days – they’re really very large and distorting what’s happening in the loan market,” said one European bank’s head of Asia syndicate. “We have to ask ourselves if it’s possible for them to sustain this [in 2013]. I suspect that it is.”
Chinese banks’ involvement in regional M&A will only become more prevalent in 2013. With the implementation of Basel III, global banks have been more guarded of extending loans in order to preserve their capital buoyancy. This has opened the door for Asian banks across the region to step up their own lending activity, and Chinese banks among them.
This goes hand-in-hand with M&A activity by Chinese companies, which reached record levels in 2012. Outbound M&A volume has increased 11.3% from 2011 to 2012, to US$62 billion across 345 deals. This is also up 23.9% from 2010.
Inbound M&A has decreased, however, to US$26.8 billion of deals in 2012 from US$47.1 billion in 2011.
Several factors have helped to drive China outbound M&A activity. For one, politicians themselves are encouraging Chinese companies to expand internationally, believing that stronger international brand-names will help boost China’s influence, helping to grow profit pools and boost the country’s economy.
Outbound M&A is one of the central targets listed within China’s 12th Five-Year Plan, spanning the years of 2011-2015.
Furthermore, Chinese companies are largely cash-rich, having benefitted as customers increase their appetite for consumer goods.
Additionally, China has been looking for greater natural resources holdings, which plays well for companies on the prowl.
“The M&A activity in Asia that has Chinese linkages are moving in a distinct direction towards resources and infrastructure,” said Alam. “First Chinese companies needed to buy resources, because they have a lot of money and China itself needs more resources to support its growth and manufacturing. And then it moves on to the next step to acquire infrastructure like ports, shipping and rails so they can transport those resources, and then finally it will be consumer brands. That’s the phase that China is now moving into – the ‘transporting their resources’ stage'."
In terms of financing in 2013, bond issuance to fund this M&A will be unlikely, yet not unheard of, especially if companies seek longer-dated debt than the typical three-to-five-year bank loan, or look to use the publicity of an intended acquisition to debut in the global debt market.
“As long as Chinese banks like CDB are highly involved in event-driven financing and then there’s no need for companies to come to the bond market,” said the syndicate banker. “But issuing bonds is part of the internationalisation process, and there are upsides of issuing such as achieving longer-dated debt and making a name for yourself in the market. There’s been rumours that Bright Food is considering an issue to raise money for acquisitions – it just depends on what the larger strategy is.”