HONG KONG, June 5 (LPC) - A bill that could force Chinese companies to delist over US$1trn of shares from US markets has sparked chatter among Asian lenders of an unprecedented wave of event-driven financings as a potential consequence.
The latest attempt by US lawmakers to restrict China's access to the world's biggest stock market comes amid rising tensions between the two superpowers, prompting companies from Alibaba Group Holding to Baidu to review their reliance on US capital.
Bankers, however, do not expect a wave of buyouts, given the challenge of raising the vast sums of debt required against a bleak outlook for the global economy in the wake of the coronavirus crisis.
"Many of those companies are privately owned enterprises. With the growing uncertainties in the global markets, based on the risk and return involved, it would be challenging for some banks to support these take-private financings," said a senior loans banker at an international bank.
The Holding Foreign Companies Accountable Act, passed by the Senate in mid-May, would ban companies from the US stock market if they fail to disclose connections to the Chinese Communist Party or if US regulators are unable to oversee their audit process for three consecutive years – something that Chinese laws do not allow.
The bill needs to clear the Democrat-controlled House of Representatives and the president's desk before it becomes law, but won strong bipartisan support in the Senate. Anti-China rhetoric, already spurred by tense trade negotiations in recent years, has escalated since the Covid-19 outbreak and China's move to impose a national security law in Hong Kong.
Chinese companies have also come under renewed scrutiny in the US after the collapse of Luckin Coffee, whose Nasdaq-listed stock had been a star performer until it said in March its staff had fabricated sales totalling over US$300m.
"Our clients have been looking for months into different options to hedge the risk of a single listing in the US as the trade war continues," said a senior loans banker at a Chinese investment bank. "Delisting is one of several options."
As of September 2019, 172 Chinese companies were listed on the three largest US exchanges, with a total market capitalisation of more than US$1trn, according to the US-China Economic and Security Review Commission.
It would take just a few of those to decide to take their stock private to create significant demand for debt funding.
In 2015, following a spate of accounting scandals and short-seller attacks that pushed down equity valuations, 30 out of 127 US-listed Chinese companies announced take-private deals. That led to over US$11bn in loans in 2016, making up 22% of the total M&A loan volume from China that year, according to Refinitiv LPC data.
Any repeat would largely depend on the support of Chinese relationship banks, especially as the ongoing spat between China and the US and worries over global credit quality post Covid-19 means fewer international lenders would be willing to back any debt funding.
"The recent developments don’t bode well for the take-private situations, especially relating to the involvement of non-Chinese lenders," said another senior loans banker at an international bank in Hong Kong.
"Covid-19 has upended many businesses and brought many uncertainties to the fore, so lending to support a Chinese company’s delisting presents greater risks now, including political ramifications."
For the first time in decades, China has abandoned a GDP growth target for 2020. Last year, the country grew 6.1%, the lowest rate in nearly 30 years.
Bankers expect more US-listed mainland firms to seek secondary listings in friendly markets closer to home as a back-up plan, without abandoning the US capital markets entirely.
Hong Kong fits the bill as its boasts one of the largest bourses in Asia and has undertaken reforms in past years to encourage secondary listings of Chinese companies. The Stock Exchange of Hong Kong also revised its rules in 2018 to permit the listing of companies with dual-class shares or weighted voting rights.
Alibaba, which chose the New York Stock Exchange for its IPO in 2014 after Hong Kong refused to allow its management structure, returned to Hong Kong for a US$13bn secondary listing last November.
Online gaming company NetEase is set to raise us$2.7bn from a secondary listing in Hong Kong, while e-commerce firm JD.com has also won approval for a similar move. The founder of Nasdaq-listed search engine giant Baidu said the company was paying close attention but had "many choices of destination" for a listing beyond the US, according to state-run China Daily.
"Privatisations and relistings involve higher costs. It is simpler and faster to go for a secondary listing. It depends on the companies’ strategies which option to go for,” said the second banker, adding that the need for loan financing would be lower for a company that has a secondary listing.
Reporting By Apple Li; editing by Prakash Chakravarti and Steve Garton