June 30, 2017 / 8:03 AM / a year ago

China M&A slowdown hurts Asian lending

June 30 (LPC/ IFR) - Government measures to control capital outflows from China have taken their toll on outbound M&As as well as related financings, leading to a significant decline in lending in Asia Pacific. Syndicated loan volumes in the region (ex-Japan) tumbled 25% in the first six months of 2017 to US$184.83bn from US$248bn in the same period last year.

The prolonged slump in lending activity in Asia led to the region’s worst performance since 2012 after Chinese authorities introduced restrictions on outbound foreign investment. Political event risks such as Britain’s exit from the European Union and impending elections in key countries on the continent added to the uncertainty, and as a result event-driven financings from Asia plummeted 60% to US$13.21bn in the first half, from US$33.22bn in the same period a year earlier.

Blockbuster outbound M&As in 2016 made a significant contribution to Asian loan volumes. Unsurprisingly their absence has caused lending to drop significantly, with China’s overall tally falling sharply by 47.5% to US$45.14bn in the first half this year from nearly US$86bn in the corresponding period last year.

"2016 was an exceptional year for M&A financing activity in the loan market, led by China, as a result of a number of jumbo-sized acquisitions boosting volumes. 2017 has seen a return to more normal levels of activity, with Chinese corporates less acquisitive given increased government scrutiny and implemented controls” said Cristian Jonsson, global head of loan syndications at Standard Chartered.

The slowdown in China also filtered through to neighbouring Hong Kong, where loan volume declined 8% in the first half to US$53.45bn from US$58bn in the first six months of 2016. Event-driven financings from the territory plunged to US$1.96bn from nearly US$6bn clocked last year.

The former British colony, which marks its 20th anniversary on July 1 under Chinese rule, is a key financing hub for China Inc, and this helped it become the biggest loan market in Asia (ex-Japan) this year. This was largely due to big-ticket loans from Chinese e-commerce giant Alibaba Group Holding Ltd , its unit Ant Financial Services Group and internet behemoth Tencent Holdings Ltd that raised US$13.3bn combined this year.

While some of the top-tier privately-owned enterprises such as Alibaba met with a good reception from the market, troubles at other borrowers such as China Huishan Dairy Holdings Co Ltd , the country’s largest integrated dairy, and China Hongqiao Group Ltd, the world’s largest aluminium producer, raised concerns among lenders.

Huishan has had its shares suspended from trading since March 24 and its banks have called an event of default on the company’s debut US$200m three-year loan signed in October 2015. Hongqiao won a waiver until June 30 to a breach of covenants relating to its publication of financials and suspension of trading in its shares.

Countering China’s slowdown was Indonesia, which skyrocketed 148% to US$9.07bn in the first half of 2017 from US$3.65bn last year. This was largely due to a US$3.355bn financing for the 2,000MW Tanjung Jati B coal-fired power plant in central Java that closed in February as well as a US$660m acquisition financing in May for a Star Energy Group-led consortium’s purchase of Chevron’s geothermal assets in Indonesia.

Meanwhile, Australia received a boost from M&A loans as its overall tally closed at US$32.63bn, surging 10.4% from the US$29.55bn raised in the first half of 2016. Event-driven loans totalled around US$7bn with the bulk of it coming from privatisations in New South Wales state, including a A$5.9bn (US$4.5bn) loan clubbed between 18 lenders for power grid Endeavour Energy. LBO REVIVAL? The Aussie market also produced a sprinkling of decent-sized leveraged buyout loans pointing to a revival of this segment of financing with green shoots emerging around new financing structures and market participants.

“A reasonably-sized market is developing in Australia for domestic currency term loan B financings and unitranche structures, which, along with a growing pool of institutional investors, bodes well for leveraged buyouts and financings,” said John Corrin, global head of loan syndications at ANZ.

A slew of LBO loans elsewhere in the region is encouraging for the market with bankers optimistic for the rest of the year. Among the eye-catching transactions brewing are a giant buyout for Singapore-listed Global Logistic Properties Ltd that could lead to a LBO loan of up to US$10bn, including record senior and mezzanine pieces. A debt financing of nearly US$2bn is expected for the buyout of Hutchison Global Communications Ltd, the wholly owned fixed-line unit of Li Ka-shing's Hutchison Telecommunications Hong Kong Holdings Ltd.

Another high-profile LBO loan is the HK$28bn (US$3.6bn) financing for the privatisation of Hong Kong-listed Chinese shoe retailer shoe retailer Belle International Holdings Ltd , which has already received commitments from nine banks other than sole bookrunner Bank of America Merrill Lynch.

“We expect a stronger second half on the back of more robust acquisition and event-driven deal flow across Asia Pacific. The strong regional liquidity among banks and institutional investors is expected to enable companies and financial sponsors to carry out larger acquisitions,” said Ashish Sharma, head of loan syndications, Asia Pacific at Credit Suisse.

“There are early signs of a better pipeline emerging after a stop-start first half. What we need to see is more broad-based activity across the region, as opposed to being reliant on consistent deal flow from just a handful of markets," said StanChart’s Jonsson. (Reporting By Prakash Chakravarti; editing by Christopher Mangham)

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