May 19, 2014 / 2:56 PM / 3 years ago

RLPC-Banks wary of loans for privately-owned Chinese firms

5 Min Read

HONG KONG, May 19 (Reuters) - Asian banks are growing increasingly wary of lending to lending to Chinese privately owned enterprises (POEs) as problems emerging on offshore loans stoke fears of higher default levels.

Two privately-owned Chinese companies - Labixiaoxin Snacks Group Ltd and China Lumena New Materials Corp - are negotiating with banks after their shares were suspended from the Hong Kong stock exchange in March.

The issues with both companies are making banks more cautious and other similar loans are taking longer to syndicate.

"Two other offshore loans are not going so well at the moment which could be related to the market's increasing concerns over POEs after the China Lumena issue," a loan banker at a Taiwanese bank said.

No offshore loans have defaulted yet, but bankers are nervous after domestic bond defaults in March. Premier Li Keqiang said that further defaults would be "hard to avoid", signalling that the Chinese government has become more reluctant to step in to support failing companies.

Private Chinese companies flocked to Hong Kong in 2013 to raise cheaper offshore loans after government regulations made onshore dollar loans more expensive.

The Hong Kong Monetary Authority has however taken steps to curb lending to China after last year's boom and is scrutinising all loans to Chinese companies, sources said.

Offshore syndicated lending to privately owned Chinese companies has slowed dramatically as a result. Volume has fallen to $2.1 billion in the year to date, compared with $12.9 billion a year earlier, according to Thomson Reuters LPC data.

PricewaterhouseCoopers (PwC) has resigned as auditor of Labixiaoxin Snacks Group Ltd after auditing China's second-largest manufacturer of jelly products's accounts since 2003.

Labixiaoxin held a lender call on May 13 about amendments to an existing $75 million loan after agreeing a waiver to avoid breaking loan covenants following its share suspension and delayed annual results.

China Lumena New Materials Corp also asked lenders to postpone repayments on an $85 million, one-year unsecured offshore loan on May 2 and is also in talks to amend the maturity date of $120 million of convertible bonds.

The company put a $120 million loan refinancing on hold after Lumena's shares were suspended on March 25 when it said that it needed more time to finalise 2013 accounts.

Taiwanese banks are the most active lenders in Asia Pacific's syndicated loan market. They were previously strong supporters of loans for private Chinese companies, which borrowed $26.7 billion in Hong Kong in 2013, and accounted for a third of Hong Kong's total volume.

Recent experiences have however made Taiwanese banks far more cautious about lending to private Chinese companies. Some syndications are proving difficult and taking longer to close.

"They (Taiwanese lenders) are taking longer in their credit processes and credit committees are asking more questions about POEs," said a syndicator from an arranging bank.

Improved Terms?

Deutsche Bank told lenders to Labixiaoxin's existing $75 million loan that the company is proposing to increase the interest rate of the outstanding amount on the May 13 call, sources said.

Labixiaoxin has also proposed to repay $11.25 million or 15 percent of the outstanding loan by May 16, with the remainder repaying according to the original repayment schedule.

Several banks asked Labixiaoxin's chairman and CFO to reschedule the repayment plan. Lenders also proposed that Labixiaoxin put 50 percent of the principal into a debt service reserve account (DSRA) after paying a 50 basis point fee to banks that agreed the waiver, sources said.

PwC could not agree procedures needed to complete the audit of Labixiaoxin's 2013 consolidated financial statements, as well as the expected timing and proposed fees, the company said.

Labixiaoxin's recent appointment of HLB Hodgson Impey Cheng Ltd as its new auditor contravenes the terms of the loan contract, which require Labixiaoxin's auditor to be one of the Big Four accounting firms.

The company's chairman has invited lenders to site visits and arranged to meet them in Hong Kong this week, bankers said. The company expects to release its 2013 annual results in late June.

Editing by Tessa Walsh

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