* Loans: Business from China to take further hit as TMT sector gets in the crosshairs
By Prakash Chakravarti, Yan Jiang and Apple Lam
Hong Kong, Oct 12 (LPC) - International lenders are taking the vetting of potential Chinese borrowers to previously unheard of lengths as the US-China trade war intensifies, dealing a further blow to already flagging syndicated loans to China.
“For any new borrowings, no matter bilateral or syndicated, we are first taking a careful look at the borrowers’ exposure to the US market because of the escalating trade war. That’s regardless of whether they are existing or new clients,” a banker at an international lender in Shanghai said.
In the first nine months of the year, internationally syndicated lending to China was 15% lower, at US$72.62bn, than a year earlier because of the slowing Chinese economy and lower M&A activity. M&A loans from China were 46% lower in the first three quarters, at US$5.51bn, from a year earlier.
Bankers see China’s manufacturing and technology, media and telecom sectors as the most at risk from the trade war, as tit-for-tat tariffs ratchet up the pressure on the country’s major exporters.
“No one wins in a trade war, but the immediate impact will be on the domestic economy in China. PRC suppliers to US companies are on the radar and most vulnerable in the current situation,” a senior loan banker in Hong Kong said.
China’s TMT sector has raised only US$1.7bn of internationally syndicated loans this year with another US$600m in the market, which is the lowest volume since 2014, and pales in comparison to full-year amounts of US$11.6bn in 2017 and US$24.4bn in 2016.
In addition to the trade war, China’s TMT is feeling the heat from increased scrutiny in the US over allegations of cyberwar, hacking and sanctions-busting, with the misadventures of some recent borrowers providing a cautionary tale to lenders.
Super Micro Computer, which closed a US$285m 364-day loan in mid-April according to LPC data, for instance found itself in the spotlight on October 4 when Bloomberg reported that computer servers manufactured by the company had been infiltrated by malicious computer chips inserted by Chinese intelligence agents. Although the report was strongly denied by alleged targets of the spying, including Apple and Amazon, shares of US-listed Super Micro plunged 40% as a result.
Bank of America Merrill Lynch was bookrunner on the April loan, which pays an interest margin of 275bp over Libor. East West Bank, CTBC Bank and MB Financial Bank participated in the loan.
Similarly, telecom equipment maker ZTE has lost 46% of its value since mid-April when the US Department of Commerce imposed a trade ban, prohibiting American companies from selling to ZTE for seven years.
Even so, the company was lucky to win consent from lenders to a request for a waiver of a covenant breach in June on a US$450m four-year loan signed in July 2014.
Earlier this month, ZTE’s problems got worse when a US judge ruled that it had violated a probation imposed in March 2017, when the company pleaded guilty for conspiring to evade US sanctions by illegally shipping US goods and technology to Iran, Reuters reported.
Either borrower could have met a very different outcome if they had waited as lenders are becoming increasingly wary of Chinese companies with exposure to the US market. TARIFF HIT LIST Banks are wary of taking long-term exposure to Chinese borrowers because of the uncertainty and administrative cost of keeping up with constantly evolving tariffs.
“For every loan we assess, we need to check if the borrower’s products are on a list hit by US tariffs and evaluate whether it [the borrower] would be affected by the trade war. If those products are on the list, then I think it is very unlikely that the loan would get credit approval,” a loan banker at a Taiwanese lender’s overseas branch said.
Last week US President Donald Trump repeated his threat to slap tariffs on US$267bn of additional Chinese imports if China retaliated for recent US moves in the escalating trade war and the US Treasury secretary Steven Mnuchin warned China not to engage in competitive devaluations of the renminbi.
Taiwanese banks are among the biggest lenders to China, but, in late June, they were already approaching their regulatory country limits for the PRC and had started to slow lending to the country’s credits.
According to Taiwan’s Financial Supervisory Commission, Taipei Fubon Commercial Bank was already at 81% of its lending limit to Chinese borrowers, at that time, while Cathay United Bank was at 74%.
Notwithstanding the trade war, the slowing Chinese economy remains a concern. Banks’ credit committees now require regular financials from borrowers to keep their risk appraisals up to date in the fast-changing environment and are learning to live with a high level of uncertainty as growth continues to fall. Last Tuesday, the International Monetary Fund cut its 2019 growth forecast for the US to 2.5% from 2.7% previously and China’s to 6.2% from 6.4%.
Reporting By Prakash Chakravarti, Yan Jiang and Apple Lam; Editing by Tessa Walsh and Vincent Baby