Chinese outbound acquisition activities have dropped precipitously since 2016, when 771 deals worth $217bn were announced, according to Dealogic. The numbers fell to 508 deals worth $107bn last year. But although those figures paint a bleak picture of opportunities in Asia’s leveraged finance market — where Chinese deals are dominant — many bankers are optimistic.
This is partly because they have already made a promising start, like with the €2.2bn loan supporting Anta Sports Products’ acquisition of Finland’s Amer Sports Oyj or the HK$25.2bn ($3.23bn) loan backing the privatisation of Hopewell Holding. Bankers are working on a host of other transactions, including New World Development’s HK$21.5bn buyout of FTLife Insurance and Tencent Holding’s for gaming company Nexon, which could be worth as much as W15 tr ($13bn), according to local media reports.
They have also adjusted their targets to reflect shifting geopolitics. The risk of a trade war between China and the US appeared to have abated in the weeks before this report went to press, but Chinese buyers have largely avoided the market. That has slowed down deals. It has also created new opportunities.
“We still expect the M&A financing pipeline to continue as we see strong China M&A outbound activity into regions and sectors relatively more insulated from ongoing US-China tensions,” says Benjamin Ng, head of Asia Pacific debt syndicate and acquisition finance group at Citi. “For example, we continue to see strong interest in potential European targets by Chinese companies.”
Perhaps the biggest reason to expect a boom in Chinese leverage finance deals is the sheer abundance of liquidity available, including on the equity side. Chinese corporations are looking for strategic investments and a huge industry of investors is gearing up to follow them.
Last year, China-based private equity funds had raised $37.3bn, according to Preqin. By the end of June 2018, they had $190.25bn available to spend on new investments, up from $154.93bn at the end of 2017. That huge pile on unspent cash, known as ‘dry powder’, should help fuel a boom in deals.
It is already happening. Anta’s acquisition of Amer saw the Chinese sportswear company partner with FountainVest, one of the largest private equity funds dedicated to China. Last year, Tencent Holdings partnered with KKR to acquire a minority state in Philippine’s tech company Voyager Innovations for $175m.
More recently, Tencent Music Entertainment Group and KKR are reported to be considering to acquire Universal Music in a deal could worth up to € 20bn ($23bn).
“If you look at the private equity space you’ve got a lot of dry powder not just with the international sponsors but also with China-focused or China-centric private equity players, such as CDH Investments and FountainVest Partners,” says a Hong Kong-based banker. “They are willing to deploy capital not just for Chinese companies but for offshore acquisitions as well.”
The trend of Chinese companies working together with private equity firms is likely to continue this year, partly because it allows both parties to diversify their risk but also because they bring different skills to the table. Private equity funds, besides offering a huge amount of funding, are experts at valuation. Corporations will tend to have more industry-specific experience, potentially including relationships with key regulators.
“Many well-rated corporations are able to pull off substantial acquisitions, but many are looking to work with private equity to reduce their risk by lowering their equity contribution for that particular acquisition and bring additional expertise to the table,” says James Horsburgh, head of leveraged and acquisition finance for Asia Pacific of HSBC.
This creates big opportunities for banks, allowing them to rely not just on relationships with acquisitive companies but also with funds directly. And there is plenty of money on offer. Chinese banks have been given a boost by a recent easing campaign by the People’s Bank of China, but foreign banks are fighting hard for mandates. European banks, doing their best to escape tepid opportunities at home, are particularly hungry.
“It’s not only the usual players but also European banks expanding in Asia on the back of growth in Asia, so they’re more than happy to come with large tickets into China focused transactions as well,” says Adnan Meraj, co-head of Asia Pacific syndicated and leveraged finance of Bank of America Merrill Lynch.
Foreign banks are playing to their strengths, working on mezzanine deals alongside senior loans. In October 2017, Crédit Agricole, Credit Suisse and Deutsche Bank arranged a $914m leveraged buyout loan for I Squared Capital to support its HK$14.497bn ($1.86bn) acquisition of Hutchison Global Communications. That transaction was said to feature junior debt. Their long experience with difficult deals, whether in terms of the financing structure or the target, appears to give them an advantage over their Chinese rivals – at least for now.
“The remaining but diminishing disadvantage Chinese banks still have is investor perceptions of their capability to execute and close offshore transactions in a timely manner, for example meeting certain funds’ requirements in complex public takeover financings,” says Lyndon Hsu, global head of leveraged and structured solutions of Standard Chartered.
“For the foreseeable future, these types of transactions will continue to have meaningful and relevant foreign bank underwriting content.”
Is stock market volatility not scaring off bidders? If anything, bankers say, the opposite is happening. Global stocks ended well down after a tumultuous 2018, with the Dow Jones Industrial Average index falling 5.6%, the S&P 500 Index 6.2% and the FTSE 100 index 12.5%. That only made potential targets cheaper, giving bankers another source of hope that a boom time is coming.
The UK, in particular, seems to offer huge opportunities. The impact of Brexit negotiations on the market has unleashed a “once-in-a-lifetime opportunity” for acquisitive foreign companies, no matter how the Brexit negotiations end, according to a Hong Kong-based banker.
“At some point asset valuations will fall sufficiently, unleashing both value and long-term investor activity,” says Hsu. “I anticipate a flip in investment activity in the second half of the year, assuming no further extensions to the Brexit date.”
Just one problem
It may sound as if the stars aligned for Asian leveraged loans. But bankers face a recurring problem that is unlikely to get much easier this year: an increasingly difficulty regulatory approval process, both in China and overseas.
China’s government has tried to stem the flow of outbound M&A. In March 2018, the Chinese government announced that it was restricting M&A from a huge array of industries it identified as ‘sensitive sectors’, including real estate, cinema, hotels, entertainment, sports clubs, weapons equipment, water resources and media.
The government also operates more quietly, by simply slowing down approvals. In February 2018, Shandong Ruyi Group announced it would buy a controlling stake in Swiss luxury brand Bally.
In early March 2019, that deal was still waiting for the Chinese government’s approval, according to another Hong Kong-based banker.
Regulators in the US and Europe are also making it harder to get approval. After the Committee on Foreign Investment in the US blocked a number of deals from China in 2017, citing national security reasons, the market has been all but closed to Chinese buyers. But last year, the European Commission also made sceptical noises — announcing a more intense scrutiny of foreign buyers. It did not name any individual country, but bankers and lawyers told GlobalCapital Asia the move was aimed firmly at China.
Some bankers think that China’s private companies will still be able to get approval from foreign regulators.
“Privately-owned companies are looking more at consumer related sectors like automotive, food and beverage, as these sectors are less sensitive,” says Jia Hu, head of corporate finance, Greater China of ING. “We can see this trend still ongoing and these sectors are still very active.”
The longer-term hope is that Chinese companies continue to broader their horizons. A tougher regulatory environment in the US pushed them to Europe. A similar backlash in Europe could force them to shift to Australia, southeast Asia, south America and the Middle East.
These countries are unlikely to be enough to fuel the mega-deals that bankers once worked on in the US, let alone anything to rival ChemChina’s $43bn takeover of Swiss seed company Syngenta in 2016. But they will at least help satiate the appetite of Chinese companies who are still undeniably hungry for more.
“One of the reasons to be optimistic is that many of our clients from China have got high ambition and high ambition means that they clearly have to consider acquisitions as part of a growth strategy,” says Horsburgh. “A large part of how this plays out will be driven by increased stability and confidence.”