Li Revives Old Lending Playbook After Cash Crunch: China Credit
Syndicated loans to Chinese companies are poised for their best quarter in two years, after a cash crunch curbed expansion in the bond market.
Alibaba Group Holding Ltd. and Shuanghui International Holdings Ltd. led $21.3 billion of bank loans denominated in either U.S. dollars or yuan since June 30, according to data compiled by Bloomberg. Including $4 billion of deals in the pipeline, volumes this quarter are set to challenge the $26.8 billion raised in the three months ended Sept. 30, 2011. Local-currency corporate bond sales total 51.3 billion yuan ($8.4 billion) this period, the slowest in two years.
Premier Li Keqiang is seeking to ensure companies have access to sufficient funds for strategic projects and offshore acquisitions, even as he tightens cash supply to rein in expansion by property developers. Li said last week in a speech in Dalian that 2013’s main economic goals can be achieved, after export and factory-output growth accelerated in August.
“Financial stress caused the government to revert to its old lending- and investment-driven playbook,” said Alaistair Chan, a Sydney-based economist for Moody’s Analytics Inc. Even so, he added, “China’s economy appears to have stabilized after June’s financial-market volatility.”
Willing to Lend
Gross domestic product is expected to rise to 7.9 percent year-on-year in the third quarter, up from 7.5 percent in the second, as electricity consumption, rail freight volumes and bank lending trend higher, Moody’s Chan said in a Sept. 15 report. Demand for loans from Chinese companies remains strong because of the improved growth prospects, according to Edmond Law, an analyst at UOB Kay Hian (Hong Kong) Ltd.
“Company spending is likely to increase on optimism the economy is stabilizing,” said Law. “Banks in China will be more willing to lend money, although the pace of loan growth will depend on asset quality and lending quotas.”
As the record cash crunch wound down, the State Council said in a July 5 statement that misallocation of capital by finance companies was hampering the restructuring of the economy. It said banks should “pro-actively support” key infrastructure projects such as railways, small companies, agriculture-related businesses and growth industries.
The cash squeeze in June sent money-market interest rates to record highs as commercial lenders scrambled to find funds to meet quarter-end requirements set by the People’s Bank of China. Cash-hungry Chinese companies turned to the offshore loan market to refinance debt or support acquisitions.
Alibaba, China’s biggest e-commerce company, in July completed a $8 billion facility, the biggest syndicated financing in the Asia-Pacific region outside Japan this year, according to data compiled by Bloomberg.
Shuanghui International last week began marketing a $4 billion two-part loan to back its $4.7 billion bid for Smithfield Foods Inc. (SFD) in general syndication, after signing the deal with eight arranging lenders in late August, three people familiar with that matter said on Sept. 13.
“We’re seeing more Chinese private enterprises going out to make acquisitions overseas,” said Lei Fang, a Hong Kong-based executive director of loan syndications at Credit Agricole SA. (ACA) “This will continue to fuel syndicated loan market volumes this year and provide more opportunities for both Chinese and international banks.”
Companies in the world’s second-largest economy have spent $119 billion on M&A transactions this year, making China the second-most acquisitive country after the U.S.
When Cnooc Ltd. (883), the nation’s largest offshore oil and gas explorer, bought Canada’s Nexen Inc. for $15.1 billion in 2012 in the biggest outbound takeover by a Chinese company, it raised $6 billion via a 12-month bridge loan signed in February.
Banks are preparing to ink at least another $4 billion of loan facilities for Chinese borrowers this quarter. China National Offshore Oil Corp., Cnooc’s parent, is seeking $3 billion in the bank debt market, two people familiar with the matter said on Aug. 22, while advertising company Focus Media Holdings Ltd. has approached existing lenders for $500 million to fund a dividend recapitalization, other people familiar with that matter said on Sept. 11.
China Electronics Corp., which via its units makes and sells mobile phones, is seeking a 1.2 billion yuan three-year offshore loan, another person said on July 10.
Inside China, the nation’s broadest measure of new credit almost doubled in August from the previous month in a sign leaders are committed to meeting economic goals even at the cost of adding financial risks. Aggregate financing was 1.57 trillion yuan, the central bank said on Sept. 10, topping the 950 billion yuan median estimate of 10 analysts surveyed by Bloomberg News. New yuan loans from banks accounted for about 45 percent of the total, down from July’s 87 percent, as non-traditional credit played a bigger role.
Yuan-denominated bond sales meanwhile are suffering with companies reluctant to sell notes amid a surge in credit downgrades and rise in borrowing costs. Yields on top-rated three-year corporates securities averaged 5.15 percent on Sept. 17, the most since November 2011, Chinabond indexes show. The yield on benchmark 10-year government bonds has climbed 56 basis points this quarter to 4.074 percent.
As growth prospects improve, bond risk has declined and the yuan is extending gains. China’s credit-default swap contracts insuring the nation’s debt against non-payment have dropped 37.3 basis points this quarter to 81.5 as of Sept. 17, according to data provider CMA. The yuan, which has risen 1.8 percent against the dollar this year, was little changed at 6.1217 as of 10:40 a.m. in Shanghai.
Companies from Hong Kong and China paid an average of about 284 basis points more than the London interbank offered rate for dollar loans signed this year, down from about 302 basis points in 2012, Bloomberg-compiled data show.
“The loans market has certainly become more attractive versus the bond market since June,” said Phil Lipton, HSBC Holdings Plc’s Hong Kong-based head of syndicated finance for Asia-Pacific. “Loan pricing has fallen over the past 12 months while tenors for blue-chip borrowers have increased to five years from three years. With lower pricing and ample liquidity, we should see more borrowers from China and Hong Kong access the loans market in the fourth quarter.”
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