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China’s take-privates: no panacea for Asia’s loan market

Shanghai_skyline_575px_Adobe_24Apr2020
By Pan Yue
25 Aug 2020

Leveraged finance bankers in Asia are counting on the possible delisting of a host of Chinese companies from the US to give a fillip to the region’s dollar loan market this year. But bankers should temper their expectations.

Asia’s leveraged finance bankers are hoping for a boost in business opportunities this year. Their main focus is on rising tensions between the US and China, and the bill passed by the US government in May requiring overseas firms to follow US standards for audits, which could lead to a spike in the number of Chinese companies exiting the US stock exchanges.

There are already some signs of that. New York-listed Chinese online marketplace 58.com was taken private by a consortium earlier this year, while Tencent Holdings is planning to buy out Sogou, and delist the search engine from the New York Stock Exchange.

The loan market will welcome any action these deals offer, after being hit hard by the Covid-19 pandemic this year. So far in 2020, 176 deals denominated in US dollars, euros and Hong Kong dollars have been announced or closed in Asia ex-Japan, worth $97bn. The numbers for the same period last year were 327 deals worth $139bn, according to Dealogic.

Bankers told GlobalCapital Asia they are hoping delistings could be a good source of loan business before the end of the year. But their optimism may be ill-founded.

For starters, there is a big question over whether enough delistings will happen this year. Many acquisition-related deals have been suspended or pulled because sellers and buyers have been unable to reach a pricing agreement. It is the same for privatisations as well.

A loans banker who was recently in talks with two Chinese companies about possible take-privates said both deals were suspended because of valuation discrepancies.

While buyers are keen to take advantage of the current market conditions to acquire assets at a cheaper price, sellers are hopeful for a rebound once the pandemic abates — making them reluctant to part with their businesses at lower valuations.

That’s not all. Even if a privatisation gets the go-ahead, it may not necessarily translate into opportunities for international banks.

Of course, there will be enough business to go around if high-profile names like Alibaba Group Holding or Baidu plan loans for their delistings from the US. In such cases, their fundraising will be big enough to warrant a large group of banks — both international and Chinese — in the syndicate.

But many other companies, which are planning to list in the mainland afterwards to benefit from the higher valuations in the domestic market, may opt for onshore financing to back their deals.

For example, 58.com raised a $3.5bn loan to support its delisting. But the loan was eventually given by Shanghai Pudong Development Bank’s Shanghai branch, which later syndicated it to a group of onshore banks.

While this means international banks could lose out on some of these deals, it does offer a precedent for borrowers worried about China’s capital control and restrictions on moving money from the domestic market offshore. Some bankers reckon that if a company clearly explains the purposes of its loan, it is likely to get approval to transfer the money overseas.

This is critical as competition to bag these mandates heats up between Chinese and international banks. Funding cost is naturally one of the main considerations for companies, which has given Chinese banks, especially the big four lenders, an edge, due to their balance sheet prowess and ability to offer cheaper money.

That has already been evident in a number of corporate loans this year, where Chinese banks have offered aggressive pricing to beat their peers amid slow deal flow.

International investment banks will have to face an additional headache too — the uncertainty over firms’ IPO plans. For the most part, companies likely to delist from the US are plotting eventual IPOs in China or in Hong Kong. But the timeline can be hard to pin down, given lengthy approval processes to get their listings off the ground.  

That means banks may be forced to provide long term financing rather than short-term bridges to support these delistings, something that may not appeal to all.

Buyout related loans will come, albeit at a much slower pace than bankers expect and at terms that will not be favourable for all. Leveraged finance bankers should keep their expectations in check.

By Pan Yue
25 Aug 2020