Caixin
Dec 20, 2018 02:56 PM
FINANCE

China M&A Loans Sink to 3-Year Low as Trade War Curbs Demand

(Bloomberg) — Chinese acquisition-related loans look set to end 2018 lower for the second year running with prospects of a turnaround looking dim as a trade war crimps appetite for overseas deals.

Event-driven loans made by Chinese firms in foreign currencies are down 41% this year to $18.2 billion from 2016’s $30.7 billion, according to Bloomberg-compiled data. Those deals include acquisition financing, leveraged and management buyout facilities and secondary buyout loans.

Overseas volumes have slumped amid tighter Chinese government scrutiny and a crackdown on capital outflows. As the U.S. trade war with China persists and dealmakers meet resistance from foreign regulators, the environment will continue to be challenging, according to Standard Chartered PLC.

“Chinese buyers are now more likely to sit on the sidelines, awaiting a clearer picture on regulation and trade tensions,” said Lyndon Hsu, global head of leveraged and structured solutions at Standard Chartered in Singapore. "China M&A loan activities will continue to be dampened depending on the trade tension outcomes and continuing external regulatory scrutiny.”

Chinese companies went on an overseas buying spree in 2016, targeting corporate trophies around the world as weak economic growth at home limited domestic opportunities. The sharp surge drew international regulatory scrutiny, while Beijing took steps to curb capital flight and weakness in its currency.

Among the largest loans completed so far this year include a $3.38 billion, five-year loan for a consortium led by China Vanke Co. Ltd. and private equity firm Hopu Investment Management Co. Ltd. to back the purchase of Singapore warehouse operator GLP Pte. Lukewarm acquisition activities from China helped drag mergers and acquisitions financing in Asia Pacific excluding Japan to a three-year low, sinking for a second consecutive year.

Market comments

Lyndon Hsu, Standard Chartered in Singapore

The reduction in M&A-related loan volume can be meaningfully attributed to the declines in China outbound flows to the U.S., Europe and Australia, amid the backdrop of China-U.S. trade tensions this year. Assets bound by strategic and national interests have drawn greater scrutiny from U.S. and EU authorities. Chinese buyers will still be interested in non-strategic and non-national interest targets overseas as their domestic economy exhibits signs of flattening.

Yuanyuan Fan, managing director of mergers and acquisitions finance, investment banking at China Merchants Bank Co. in Shenzhen

The China-U.S. trade tensions and resistance from European regulators on Chinese investments have been the main issues. The decline is also due to a significant drop in the number of China firms’ de-listing activities from overseas stock markets and relisting at home as the difference in valuations in respective markets is narrowing. Demand for overseas acquisitions by Chinese firms will be always there, more depending on external uncertainties. We expect to see more loan opportunities in their outbound investments into not-so-sensitive sectors such as consumer products. If China-U.S trade talks have a breakthrough, acquisitions of low-tech companies could be more.

Contact editor Yang Ge (geyang@caixin.com)

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