Chinese offshore loans set to rise
The year started with a few headwinds for China-focused loans bankers, including uncertainties coming from the US-China trade war, rising bond and loan defaults and reduced Taiwanese liquidity. But with huge refinancing needs and a volatile bond market, many are anticipating a promising year. Pan Yue reports.
A number of Chinese corporates turned to the offshore loan market for refinancing at the beginning of this year. Chinese automobile retailer Zhejiang Geely Holding Group is eyeing a €1.4bn facility to refinance a bridge loan closed last year for its purchase of a share in Swedish truck maker AB Volvo.
Separately, Haitong International Securities Group is raising a HK$13.8bn ($1.7bn) refinancing led by a 16-strong group of mandated lead arrangers and bookrunners.
“Between the loan and bond market it’s been a pretty positive start to the year. In particular, compared to where we were in November and December, things definitely seem to have moved into a more positive phase,” says Phil Lipton, managing director, head of loan syndications, Asia Pacific, at HSBC.
There is plenty more where that came from. A total of 215 offshore deals from China and Hong Kong, worth a combined $81bn, are maturing this year. In the onshore market, Chinese companies have 219 deals worth $32bn coming due, according to Dealogic data.
There is a huge refinancing need coming from bonds as well. Some Rmb4tr ($596bn) of onshore bonds issued by Chinese companies are due in 2019, in addition to $56bn of offshore Chinese corporate bonds.
“There's a healthy syndicated loan refinancing volume for Chinese names in 2019, because if you have a look back to 2016 the volume was quite strong for offshore Chinese corporates,” says Chester Wang, director of loan syndications of ANZ.
The refinancing need is clearly expected to translate into more offshore syndicated loans this year, but volumes will also be driven by changes in the offshore-onshore funding spread. Bankers say that Chinese companies are moving overseas for funding since offshore borrowings are generally cheaper and have a longer tenor.
“The onshore market became challenging for borrowers, with three and two year tenors giving way to one year loans,” says Sergio Morita, head of syndication & distribution, Asia Pacific financing group, Credit Suisse. “This has led to more companies seeking to tap offshore financing. However, in general, this is only feasible for those companies who have a source of repayment outside of China,”
The migration from onshore to offshore is also being driven by a change in Chinese companies’ strategy. They are now putting much more emphasis on managing the long-term health of their balance sheets, rather than relying on short-term funding that could disappear quickly.
“I think traditionally Chinese companies have sought shorter term financing for working capital needs,” says Wang. “We are seeing a bit of a mindset shift to lock down longer term financing while they can reduce the volatility of liquidity available to them.”
This does not mean business will boom for offshore bankers this year. Last year, the Chinese government took several measures to encourage commercial banks to lend onshore, especially to small and medium sized enterprises. This included three cuts to banks’ reserve requirement ratio, relaxing capital restrictions for some lenders, and capital injection. This January, the country’s central bank released another Rmb560bn ($83bn) of liquidity into banking system, the highest single-day injection in the country’s history.
However, some Chinese bankers tell GlobalCapital Asia that even though the lending restriction has been loosened, they are still concerned about rising credit exposure and remain cautious about granting loans, especially to privately-owned enterprises, leaving these companies struggling in the onshore market.
“The market’s quite interesting at the moment,” says Lipton. “Usually you see Chinese companies coming offshore when onshore liquidity tightens, but right now we’re seeing a good number of enquiries from Chinese corporates despite the easing onshore liquidity. What the Chinese corporates have also realise is that liquidity conditions can change quite rapidly onshore, so it makes sense to keep a number of borrowing avenues open.”
Volatile bonds market
There is another source of business bankers are watching: the bond market. Asia’s dollar bond market has had a strong start to 2019, but after volatility throughout much of 2018, many companies know they need alternatives. During the second half of last year, a number of Chinese property companies struggled issuing bonds and were paying high premium, which pushed them to raise loans instead.
“Over the past few months we’ve seen increased borrower activity in the loan market. Loans may be looking like a more compelling alternative to bonds lately, with several cases of companies borrowing in the loan market to repay their outstanding bonds,” says Morita.
The bonds are usually unsecured and give issuers more flexibility, but if a company has a good relationship with banks and is willing to offer collateral, it will be able to borrow at a cheaper price. Many bankers say that for Chinese companies, for whom cost has always been the key consideration, raising money through loans is a much more attractive option.
“Bond pricing was rising quite meaningfully before the new year and while that has come down, there's still a gap between bond pricing and loan pricing,” says Lipton. “Certainly for the higher yielding companies, loan pricing is quite compelling at the moment.”
Some companies are even using loans to refinance their equity-linked deals. In January, ASM Pacific Technology, a Hong Kong-based semiconductor assembly and packaging company, launched a HK$2.25bn ($287m) five year facility to refinance a convertible bond maturing this year. The debut offshore deal from ASM attracted many lenders’ interests thanks to its strong financial performance.
Other opportunities that bankers have pointed out include Chinese companies actively expanding their investor base. Taishin Financial Leasing (China) tapped the offshore loan market for the first time for a $80m three year facility this year. The company, which raised two onshore deals in the past, is aiming to expand its investor base by targeting offshore lenders this time.
It is clear that there will be enough supply of loans coming from Chinese borrowers, but the question is whether all of them can have a successful syndication in the offshore loan market.
After a few onshore and offshore loans defaulted last year, bankers are being increasingly selective. Last year, state-owned Zhongke Construction was sued by eight banks for failing to repay a Rmb1.05bn ($156m) syndicated loan, while in the offshore market, China Huiyuan Juice Group had a €180m syndicated loan default.
Many origination bankers reckon that this year their focus will be in bringing state-owned enterprises or top privately-owned enterprises into the offshore market. But Morita says that even SOEs and strong POEs will need to have their financing well-structured and secured this year.
With worries about rising defaults and the Chinese government’s control on capital outflows, bankers are more careful about borrowers’ sources of repayment. Many international bankers suggested they tend to only lend to companies which have cash flow generated overseas, while firms which plan to use the loan proceeds for onshore business will have a difficult time obtaining offshore loans.
Another challenge for Chinese borrowers is the reduction in Taiwanese liquidity. Taiwan government required Taiwanese banks to keep their China exposure within 100% of their equity, and a number of Taiwanese banks are close to that limit. Many Taiwanese bankers told GlobalCapital Asia that last year, government officials were in talks with them and told them to reduce their lending to China.
Taiwanese bankers say that they will avoid sectors including commodities, real estate, and other areas which are over supplied. The requirements these bankers face from their headquarters when it comes to pricing, shareholder background and cash flow is getting even higher this year.
Bankers say that many Chinese borrowers could overcome these problems the old-fashioned way: by increasing their margins. But many borrowers have tried to go in the opposite direction.
Several bankers say that, while they are willing to support their Chinese clients, tighter pricing means they can no longer lend to them.
Small and medium companies, as well as repeat borrowers, are expected to pay up this year. Some bankers say out that the price jump for a non-investment grade name could be as high as 100bp.
There seems little doubt that this year will see a strong supply from China offshore loans, due to refinancing needs and difficult onshore market conditions. The bond market may be open for real estate issuers, but the volatility will continue to bring business for loans bankers. The only question is quite how much they will earn.