Pick-up in China M&A loans is just a pipe dream
A handful of outbound M&A deals announced in the second half of 2018 have given leveraged and acquisition finance bankers hopes for a rebound in action this year. But with many roadblocks ahead, being "cautiously optimistic" will be critical.
A slowdown in event-driven financings, particularly from China, over the past two years has crimped loan volumes in Asia ex-Japan, with bankers blaming the mainland government’s control over capital outflows and a tighter regulatory environment globally for the decline.
But is there light at the end of the tunnel? Some bankers appear to think so.
Recent deals, like a €2.2bn loan for China’s Anta Sports Products’ acquisition of Finland’s Amer Sports Oyj and a $870m borrowing for Zijin Mining Group to support the acquisition of Canadian miner Nevsun Resources, are being seen as early signs of a pick-up in activity.
That idea may not be entirely misplaced. One of the reasons outbound Chinese M&A deals this year could see a fillip is thanks to the volatile stock market, say bankers. The global market had the worst year in a decade in 2018 with the Dow Jones Industrial Average index falling 5.6%, the S&P 500 Index 6.2% and the Nasdaq Composite 3.9%. The falls mean target companies are trading at cheaper valuations than before, offering promising acquisition opportunities for buyers.
The huge amount of dry powder with Chinese private equity funds is another factor. At the end of the first half of 2018, PE funds had $190.25bn on hand, up from $154.93bn at the end of 2017 and a big jump from $64.64bn in 2016, according to data provider Preqin. All that money needs to be put to work sooner or later.
But it may be too soon for loans bankers to call the revival of the Asian acquisition financing market.
First of all, the Chinese economy is slowing down, with many companies struggling to survive and repay their outstanding loans or bonds. A huge wall of maturity this year is also cause for concern given volatile conditions and the threat to market access, meaning acquisitive companies will naturally continue to be conservative in their investment activities.
In addition, the Chinese government’s control on capital outflows is still worrying.
Last March, the mainland government included as “sensitive sectors” for outbound investments: real estate, cinema, hotels, entertainment and sports clubs, in addition to weapons equipment, water resources and media. Another outbound investment rule issued by the National Development and Reform Commission also took effect the same month, regulating investments made by Chinese companies’ overseas, and requiring financial institutions to gain additional approvals from the NDRC. The screws over movement of capital are certainly tight.
Then, of course, there is also the intense scrutiny of Chinese outbound activity by governments. The US has all but put a stop to its companies moving into the hands of Chinese owners, while there are growing signs of discontent elsewhere too.
For example, on Monday, Australian hospital operator Healius rejected a A$2bn ($1.4bn) offer from Beijing-based construction firm Jangho Group, saying the deal undervalues Healius while also citing uncertainties around gaining approval from Chinese and Australian regulators.
In addition, the European Commission announced in November more intense screening of Europe inbound M&A, which bankers and lawyers reckon directly targets Chinese buyers. Although the screening mechanism is not an overriding regulation that can block acquisitions, and so its effects could be limited, some bankers believe it shows concerns among European regulators about hungry Chinese firms.
Irrespective of these factors, can there actually be a boost in levfin activity thanks to China-driven deals? It’s absolutely possible. But given the rocky path, loans bankers may be better off looking for business opportunities across the board, rather than counting their levfin chickens before they hatch.