Chinese lenders eat into foreign banks' Asian buyout loan business

[HONG KONG] Faced with slower economic growth and rising bad debts at home, Chinese banks are muscling in on the US$9 billion private equity buyout loans business in Asia, using generous terms to grab market share from European and US rivals.

The lenders' aggressive pursuit of these specialised loans has so far this year boosted their share of the Asia LBO loan market to 32 per cent, five times a year ago, Thomson Reuters LPC data shows.

Bank of China Ltd (BOC), for example, is increasingly emerging as sole underwriter for private equity firms seeking to finance buyouts, as a way to help offset declining loan growth, bankers said. "There is a desire among China banks to diversify their revenue sources," said Grace Wu, a Fitch Ratings analyst.

Bankers say LBO loan demand in China is expected to rise further following a wave of privatisations of US-listed mainland companies, with a record US$40 billion in buyouts launched this year, according to Thomson Reuters data.

Chinese banks have traditionally focused on financing state-backed acquisitions of foreign assets, but in recent months the lenders have started to single-handedly underwriting entire loans of private enterprises, which offer twice the fees typically earned from Chinese state-owned enterprises.

Mainland banks are also reaching out to a broader client base by providing loans in US dollars, not just in yuan.

In August, BOC sealed a US$1.9 billion loan for Asian private equity firm GO Scale Capital's purchase of an 80.1 per cent stake in the Lumileds business of Dutch firm Philips.

Although the acquisition remains uncertain because of US government concerns, the bank has sold some of the risk to other Chinese and foreign lenders after initially displacing Morgan Stanley as sole bookrunner on the financing, bankers said.

The same month, Ping An Bank and Shanghai Pudong Development Bank debuted in the Asian LBO business, underwriting a US$1.1 billion loan to help finance the US$3.3 billion purchase of New York-listed WuXi PharmaTech. "Chinese banks are aggressive and flexible in financing terms to support a strategic acquisition for a Chinese corporate or financial sponsor," said Benjamin Ng, head of debt syndicate and acquisition financing, Asia Pacific, at Citigroup. "If there is a Chinese angle to the situation, there is a strong likelihood of Chinese banks leading the debt financing." Mainland lenders are also more generous with their loan terms than foreign rivals, their transaction history shows.

Most global banks are comfortable underwriting loans with a leverage multiple of around five times or less for no longer than five years, but Chinese banks can go as long as seven years: for instance, the Lumileds acquisition loan is for seven years, while the leverage on the WuXi Pharmatech buyout loan is slightly over seven times. "Chinese banks are making a big splash and they are here to stay in this product. The big question is: will there be room for others?" head of debt capital market at a US bank said.

REUTERS