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LBO loans: Chinese banks step up

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By Pan Yue
22 Jun 2021

The recent round of M&A and leveraged buyout financing provided by Chinese banks shows their growing ambition in the more complicated and riskier part of Asia’s loan market.

Chinese banks appear to be stepping up in funding leveraged buyouts and acquisitions.

Take the example of private equity firm Primavera’s acquisition announcement of infant formula maker Mead Johnson’s China business this month. China Merchants Bank is the sole underwriter of a term loan to support the $2.2bn deal, said three sources away from it.

The bank has offered a seven year loan with a leverage ratio of around six to seven times — a considerably high level for Asia’s loan market.

Although senior bankers had already expected a high leverage for the deal during the bidding stage — given Mead Johnson’s mainland business has come under pressure due to challenges from Covid-19, a low birth rate in the country, and fears still rampant from a 2008 milk scandal in the country — the willingness of China Merchants to provide the entire financing on its own, and with a tenor of seven years, marks a clear shift in its risk appetite.

It doesn’t stop there. Chinese banks have also featured in a recent deal for 51job, a Nasdaq-listed Chinese recruitment company that is being taken private.

China Merchants’ Shanghai branch, together with Shanghai Pudong Development Bank’s Shanghai branch, have offered a term loan of $1.825bn to support a DCP Capital Partners-led consortium’s take-private of 51job.

The growing presence of Chinese banks in pole positions in leveraged loans continues a trend that began in 2018, when they started stepping up in corporate acquisitions deals.

That included China Citic Bank’s $3bn loan for the purchase of Tianqi Lithium’s Sociedad Química y Minera de Chile in 2018, as well as China Construction Bank’s $840m loan for Zijin Mining Co’s acquisition of Nevsun Resources the same year. At that time, many saw those transactions as evidence that Chinese banks had overcome the long internal approval process obstacle to ready critical fundraising on time.

But the recent developments show a different picture.

For instance, SPDB surprised the market by being the sole underwriter of a $3.5bn term loan to support online marketplace 58.com’s delisting from Nasdaq in June last year. The lender also worked with Ping An Bank to jointly provide a $1.1bn loan for China Biologic Products Holdings’ delisting from the US last year.

China Minsheng Bank, meanwhile, used its Hong Kong and Shanghai branches to arrange a $2.08bn financing for Sina Corp’s privatisation, with the loan syndicated both offshore and onshore in October 2020.

The deals reflect the changing risk appetite and lending strategy at some of China’s largest lenders. Their willingness to underwrite chunky corporate M&As had already been noted, but muscling in on LBO loans is another step into a market previously dominated by international lenders.

LBO financings are usually more complicated in structure and higher leveraged than strategic acquisitions, posing challenges to Chinese banks unwilling to accept leverage ratios of more than four times just three years ago. This meant LBO financing had long been mainly taken up by international banks, before Chinese banks entered the picture in strength. 

Should international banks worry about the rising clout of mainland banks with possible LBO clients? Perhaps not yet, as global banks can still get advisory roles — and the juicy fees that go along with it — on deals funded by Chinese banks.

But given how rapidly China’s banks have gained ground in Asia’s LBO market, it won’t be long before they give global banks a real run for their money. More competition is very much on the cards.  

By Pan Yue
22 Jun 2021