Sinopec Beats Bond Freeze as China Inc. Readies for Acquisitions
For investors seeking signs of whether Chinese companies will accelerate overseas takeovers, the bond market offers clues.
Firms from China Petroleum and Chemical Corp. to China Huaneng Group Corp. sold a record $22.8 billion of dollar-denominated notes in the second quarter, before interest rate jitters froze the market, data compiled by Bloomberg show. With bank lending tightening in China and the economy cooling, the money raised with dollar-bonds offers companies another way to finance overseas takeovers.
“The companies that utilized the window to raise cheap funds in the first half are obviously in a better position to pursue M&A deals in the near future,” said Bob Partridge, a Hong Kong-based managing director who oversees China transaction advisory at Ernst & Young LLP. “As soon as opportunities crop up, they will be able to pull the trigger with ready cash.”
The dollar bond market for Chinese companies seized up in early June, as China tightened liquidity and Federal Reserve Chairman Ben S. Bernanke signaled an end to stimulus measures by the U.S. central bank.
Dollar bond sales used to be the domain of a few state-run enterprises and domestically focused real estate developers, while most Chinese companies mainly relied on bank loans for takeovers.
That changed as yield premiums on dollar bonds versus Treasuries reached a three-year low in January. The yuan’s 1.6 percent gain against the dollar this year -- the biggest among emerging-market currencies -- also made bond sales denominated in the greenback more attractive to Chinese issuers because the cost of repaying the debt falls.
In at least $4.7 billion of the total bond sales in the quarter, acquisitions were specified as a use of proceeds. That compares with at least $3 billion in the year-earlier quarter, according to a Bloomberg News search of marketing materials, statements to the Hong Kong stock exchange and ratings company reports. Another $4 billion was raised in the most recent quarter to refinance debt stemming from takeovers, the documents show.
“With this new avenue of financing, Chinese companies are better positioned to pursue investment opportunities abroad,” said Fang Fang, JPMorgan Chase & Co.’s head of investment banking in China, whose bank helped Cnooc Ltd. sell $4 billion of dollar bonds in May.
Chinese overseas acquisitions could use a boost. Companies made $28.3 billion of deals abroad in the first half, roughly equal to the year-earlier period, according to data compiled by Bloomberg. That includes Shuanghui International Holdings Ltd.’s agreement in May to pay about $7 billion, including debt, for pork producer Smithfield Foods Inc. (SFD) in the biggest Chinese takeover of a U.S. company.
Dealmaking still lags behind 2009, when a record $36.8 billion of outbound transactions were struck in the first half, the data show.
Bond-sale proceeds have helped companies load up with cash for possible acquisitions. Chinese non-financial companies listed on the mainland and in Hong Kong held a combined $853.4 billion of cash and near-cash items as of their latest filings, 9 percent more than 12 months earlier and almost double the amount three years ago, according to data compiled by Bloomberg.
“Big war chests are being built,” Ernst & Young’s Partridge said. “The most active dollar bond issuers are also the most highly focused in overseas acquisitions.”
China Petroleum and Chemical, the state-owned refiner known as Sinopec, raised $3.5 billion in a dollar bond sale in April to finance investments overseas, according to a statement to the Hong Kong stock exchange. Sinopec’s parent company said on June 24 it bought a stake in an oil and gas field in Angola from U.S.-based Marathon Oil Corp. (MRO) for $1.52 billion.
Sinopec made almost $30 billion of purchases abroad in the past decade, making it China’s most acquisitive company.
Dollar-bond sales by Chinese companies were choked off in the past month as yield spreads widened to as much as 430 basis points more than Treasuries on June 24, from 366 basis points on May 31, according to JPMorgan Chase & Co. indexes. Spreads have since narrowed to 400 basis points as of July 10, the indexes show.
Electric utility Huaneng Group was the last Chinese company to sell dollar bonds, issuing $400 million of notes on June 4.
The recent rate turmoil has “affected the attractiveness of the bond market” compared with other sources of financing, said Angela Lee, a spokeswoman for Lenovo Group Ltd. (992), the world’s biggest personal computer maker. The Beijing-based company, which earlier said it was considering a dollar bond sale to fund acquisitions and expansion, will “continue to monitor” the market, she said.
Lenovo has held talks with International Business Machines Corp. (IBM) to purchase its server division for as much as $4.5 billion, people familiar with the matter said in April. The negotiations stalled in May over price, according to a person with knowledge of the matter.
Still, demand for dollar-bond financing among companies will probably continue to grow because deals not seen as “strategic” by China’s government will struggle to get funding from state-owned banks, said Stephen Gore, the Hong Kong-based head of M&A advisory for Bank of America Corp. in the Asia-Pacific region.
“They now have a stronger need to diversify the source of financing, and the maturing dollar-bond market may be a good option,” Gore said.
Meanwhile, China’s cooling economy is pushing boards to scout for acquisitions abroad to keep sales from stagnating, said Partridge. The nation’s government targets 7.5 percent growth in gross domestic product for this year, which would be the slowest annual pace since 1990.
“We’re very likely to see a significant pickup in the number of deals announced in the second half,” Partridge said.
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