Hong Kong Wins From China Credit Woes as Loans Reach Record

Hong Kong’s syndicated loan market enjoyed a record first quarter as Chinese companies shunned local financing in favor of cheaper offshore funds.

Lending in the city surged 41 percent to $20.8 billion in the first three months compared with a year earlier, the busiest start since Bloomberg starting tracking the data in 1999. Volumes in China shrank 45 percent to $5.8 billion, the worst first quarter in four years. Onshore borrowing costs for the nation’s top-rated companies jumped 30 basis points to 5.89 percent in March, the biggest monthly rise since November, ChinaBond data show.

Hong Kong is luring Chinese companies as interest rates surge in the world’s second-largest economy amid lending curbs and its first onshore bond default. In the three months through March, borrowers led by Cnooc Ltd. and Dongfeng Motor Group Co. agreed offshore loan margins that averaged 227 basis points more than benchmark rates, down from 254 a year earlier.

“The trend for offshore borrowing in Hong Kong is likely to continue this year,” said Pedro Cheung, the head of corporate finance at Bank of China Ltd. (Hong Kong). “China’s onshore borrowing costs have increased and liquidity is relatively tight.”

Average interest margins in China for dollar-denominated loans were at 276 basis points in the first quarter, 49 basis points higher than the Hong Kong equivalent, data compiled by Bloomberg show. The rate increased from an average 246 basis points in the fourth quarter of 2013.

Loan Pipeline

Ten mainland borrowers are currently syndicating $3.6 billion of facilities in Hong Kong. They include China Hongqiao Group Ltd., the nation’s largest non-state aluminum producer, which is marketing a $700 million three-year amortizing loan. Legend Holdings Corp. is syndicating a $300 million-equivalent three-year bullet facility via offshore unit Right Lane Ltd.

Premier Li Keqiang said in March that financial leverage is making the economy’s outlook more complex as the government reins in excessive borrowing to achieve this year’s 7.5 percent growth target. The People’s Bank of China, which engineered a cash crunch in June to spur deleveraging, withdrew more funds from the banking system last month.

The seven-day repurchase rate, a gauge of interbank funding availability, jumped 95 basis points to 4.84 percent on March 27 in Shanghai, the biggest daily rise since Jan. 20, according to a weighted average compiled by the National Interbank Funding Center. A higher rate indicates tightening liquidity.

Diversify Risk

Syndicated loan growth in China will be “stable” in 2014, according to Mao Heng Tang, senior adviser at the China Banking Association. Such transactions will help to diversify lenders’ risks in China, he said at the Asia Pacific Loan Market Association conference in Shanghai today.

While foreign lenders in China have advantages in terms of products and experience when arranging cross-border loans, local competition for deposits and talent will pose challenges for them, Gordon Lam, Chief Executive Officer of Hang Seng Bank China Ltd. said at today’s conference.

“Offshore loan pricing is still attractive,” said Kim Jin, a Shanghai-based vice president of syndications at Westpac Banking Corp., in an interview. “Many Chinese companies are aiming to lock in low prices for medium- and long-term funds while there’s still a window of opportunity.”

China Resources

Cnooc, China’s biggest offshore oil and natural gas explorer, inked the quarter’s largest offshore borrowing in February with a $2 billion one-year term loan. The facility paid 75 basis points more than the London interbank offered rate, two people familiar with the matter said, or less than a third of China’s average loan margin in the first quarter.

China Resources Power Holdings Co., a unit of conglomerate China Resources National Corp., last month completed a HK$7.8 billion ($1 billion) five-year term loan that priced at 153 basis points above the benchmark rate.

Loans to mainland companies by Hong Kong banks surged 33 percent to HK$3.6 trillion, or 19.7 percent of lenders’ assets, at the end of 2013, according to Hong Kong Monetary Authority data. That compares with HK$2.7 trillion, or 16.2 percent of their assets, a year earlier, the data show.

“The expansion of the sector’s credit exposure to mainland China-related business remains a challenge, and banks should continue to manage conservatively the credit risks,” the regulator said in its Financial Stability report last month.

First Default

China is seeking to contain credit growth and industrial capacity in a slowing economy which last month experienced its first onshore bond default when Shanghai Chaori Solar Energy Science & Technology Co. failed on March 7 to make a full coupon payment. The yuan has slid 2.4 percent against the dollar since Dec. 31, making it the worst performing major currency in Asia.

Increasing bank funding costs may exert upward pricing pressure on Hong Kong loans, which could curb Chinese companies’ borrowing appetite, Bank of China’s Cheung said. Facilities now in syndication may not fully reflect such costs due to a time lag between their mandating and marketing, he said.

“The pipeline in the next three months is still very strong because state-owned enterprises and private companies have plans to raise money in offshore markets such as Hong Kong,” said Westpac’s Jin. “The longer-term outlook over the next six to nine months depends very much on how the economy grows as well as the government’s monetary policy.”

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