Banks Are Willing to Provide M&A Loans, So What's Stopping Them? (AI Translation)

【周刊提前读】银行并购贷供需皆有意愿 堵点在哪里？

The Chinese merger and acquisition (M&A) market has shown mixed results and challenges through the first half of 2024, despite initial expectations for an improvement compared to previous years [para. 1]. In the first half of the year, a total of 3,674 disclosed M&A transactions occurred, showing a year-on-year decrease of 3.32%, and the total transaction value fell by 12.45% to about 709.9 billion yuan [para. 2]. Among notable transactions, Wanda Group's company secured new strategic investors, with an approximate investment of RMB 60 billion from entities including ADIA and Mubadala Investment Company [para. 3].

M&A loans in China, introduced in 2008, are utilized to cover the financial costs of M&A transactions and have seen limited but increasing adoption [para. 5]. In 2023, China Merchants Bank led with RMB 193.348 billion in M&A financial business, reflecting a 3.71% year-on-year increase [para. 7]. A significant aspect for banks is the evolving competition in the M&A loan sector, driven partly by reduced non-standard business and falling interest rates [para. 8]. China Merchants Bank has been noteworthy for completing influential M&A projects, topping Bloomberg's Asia-Pacific rankings in 2023 as both bookrunner and lead arranger [para. 10].

The policy landscape has recently seen movements to bolster M&A activity. The General Office of the State Council introduced measures to enhance venture capital and acquisition loans for technological innovations in June 2024 [para. 13]. Experts like Wu Yibing of Temasek are hopeful about the maturation of China's capital markets and note the potential growth in M&A demand driven by lower interest rates [para. 12]. UBS's Lu Suicheng also sees an increase in M&A discussions due to difficulties companies face in going public [para. 14].

Merger and acquisition loan policies were last revised by the China Banking Regulatory Commission (CBRC) in 2015; these changes included extending loan terms from five to seven years and increasing the permissible loan proportion to 60% of the transaction value [para. 27]. However, challenges persist, such as balancing funding ratios and repayment schedules with business timelines [para. 37]. Financial tools like acquisition loans provide exit strategies alternative to IPOs, supporting corporate capital market participation [para. 15][para. 16].

Commercial banks dominate the M&A lending space, focusing on comprehensive financial services including advisory roles, risk management, and collaborative intermediary activities [para. 21]. Reports indicate discrepancies in regional regulatory standards regarding what constitutes "actual control" in M&A transactions, demanding more uniform and clear guidelines [para. 42].

The complexity of M&A loans includes due diligence on both acquiring and target companies, post-transaction profit assessments, and the requirements of extensive cooperation among third-party institutions [para. 24]. Large banks typically administer these M&A loans, often structuring them as syndicated loans to mitigate risk [para. 19][para. 22].

Cross-border mergers and acquisitions pose additional challenges due to risks associated with country-specific regulations and currency fluctuations [para. 47]. Chinese enterprises have shown fluctuating activity in international M&A, with a significant peak in 2016, reflecting a more cautious and regulated current landscape [para. 48].

Considering policy improvements, experts suggest expanding the applicability of M&A loans to include supportive strategies for high-tech firms and flexible repayment schedules. There's also advocacy for pilot programs within well-managed commercial banks to test phased regulatory relaxations, facilitating strategic sectors like technology and manufacturing [para. 55][para. 58].

In summary, while China's M&A market is facing downturns in transaction volumes, evolving regulatory measures and increasing competition in M&A loans signal a shifting landscape. With further reforms and strategic policy enhancements, there's potential for greater adoption and efficacy in supporting both domestic and cross-border M&A activities [para. 59][para. 60].