November 8, 2019 / 9:36 AM / 5 days ago

Lenders look for trade-war spoils

* Loans: Mounting US hostility towards Chinese listings spurs hopes for buyouts

By Apple Li

HONG KONG, Nov 8 (LPC) - The ongoing trade war between China and the US is raising hopes for a round of event-driven financings as more Chinese companies consider transferring their listings from the US to their home market.

The tit-for-tat dispute between the world’s two largest economies is threatening to spill over into the capital markets, with hardline US politicians calling for restrictions on Chinese listings in the US and limits to American investment in Chinese companies.

“Chinese companies may start considering listing elsewhere due to the uncertainty. If this materialises, the financings involved are going to be massive, and this is certainly something we would like to take part in,” said a Hong Kong-based loans banker at a Chinese bank.

US legislators in June tabled measures to block listings from foreign companies that fail to submit to US regulatory oversight of their auditing process. Companies already listed in the US - including Alibaba, JD.com and PetroChina - would have three years to comply or face delisting.

Senators in October also asked a federal retirement fund to review its decision to track an index that includes Chinese stocks, flagging the potential for further restrictions.

Most bankers view the idea of a forced delisting of Chinese companies as preposterous, given the damage it would do to US investors, but Alibaba Group’s imminent listing in Hong Kong has fuelled the idea that US-listed Chinese companies must at least consider alternative venues.

As of February, 156 Chinese companies were listed on US stock exchanges with a total market capitalisation of US$1.2trn, according to the US-China Economic and Security Review Commission.

That total includes tech sector behemoths such as Alibaba (currently worth US$453bn), rival JD.com (US$45bn) and internet search engine Baidu (US$36bn).

Chinese oil and gas giant PetroChina is listed on the New York Stock Exchange, among other bourses, and had a market capitalisation of US$150bn, while China Life was valued at US$108bn on the US exchange.

Part of the financing requirement would come from equity through a secondary listing on other stock exchanges. However, a substantial portion of debt financing would still be needed, including initial short-term loans to bridge the gap before any subsequent equity raising outside the US.

“The market capitalisations of these US-listed Chinese companies would take a hit on a forced delisting. That would reduce the overall financing required to buy out the US shareholders, but it would still be quite large,” said a senior loans banker at an international bank in Hong Kong.

Others pointed out that a bridge-to-equity financing was the best solution to carry out the delisting exercise, although it was still fraught with tremendous market risk given the vagaries of the equity capital markets. Alibaba’s plans to raise up to US$15bn from a secondary listing in Hong Kong have been delayed since August amid growing political unrest in the territory. The company is set to seek approval from the Stock Exchange of Hong Kong for the proposed share sale in the week of November 11.

On the other hand, recent developments in China’s equity markets could benefit Chinese companies looking to delist from the US stock exchanges.

China’s new technology-focused Shanghai Science and Technology Innovation Board, or Star board, has already welcomed 50 new listings since its launch in July, and another 125 companies have filed IPO applications.

“More options for relisting in China could provide comfort for lenders looking to do take-private financings, as proceeds from the listing could potentially be the source of loan repayment,” said the Beijing-based banker.

GOOD OLD DAYS

Bridge-to-equity financings were popular earlier this decade when a slew of overseas-listed Chinese companies delisted from overseas stock exchanges with a view to relisting in China at higher valuations.

Advertising company Focus Media Holding set the precedent as the first Chinese company to transfer its US listing to China after it delisted from Nasdaq in 2013 and relisted through a reverse takeover in Shenzhen in December 2015. That trend saw some 30 out of 127 US-listed Chinese companies announcing take-private exercises during 2015 alone.

Chinese banks dominated the lending for these exercises given their familiarity with the companies going private and the lure of ancillary business associated with the relistings in China.

The largest loan for such a deal was a US$3bn-equivalent seven-year facility in July 2016 backing the US$9.3bn buyout of mobile security technology company Qihoo 360 Technology. China Merchants Bank was the sole underwriter of that financing, which attracted five other Chinese banks. CMB also provided another US$400m-equivalent 12-month bridge loan.

Qihoo 360 relisted in Shanghai in 2018 in a backdoor listing through a Rmb50.42bn (US$7.96bn) merger with publicly traded lift manufacturer SJEC Corp.

As a result 2016 generated over US$11bn in loans for the take-private situations, making up 22% of the total M&A loan volume from China that year, according to Refinitiv LPC data.

In subsequent years, tightened regulatory scrutiny on backdoor listings in China dealt a blow to the delisting trend. That combined with tightened controls on outflows of capital from China has knocked the wind out of the sails for M&A lending.

If the delistings revive, it could also provide a significant fillip to lending in China, which has dropped to approximately US$95.8bn in the first three quarters of 2019. M&A loans from China had registered a mere US$5bn in that period – a far cry from 2016 volume. ( Reporting by Apple Li; additional reporting by Prakash Chakravarti; Editing by Steve Garton)

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