China education firms go on funding spree

Hong Kong

THREE US-listed Chinese educational firms are tapping the offshore loan market, testing appetite among lenders at a time when mainland regulators are clamping down on the sector.

Two of the borrowers - Nasdaq-listed New Oriental Education & Technology Group and NYSE-listed OneSmart International Education Group - are making their loan debuts, while NYSE-listed TAL Education Group is refinancing its debut loan from 2016.

New Oriental is raising up to US$250 million, while OneSmart is eyeing up to US$200 million and TAL Education at least US$400 million. All three loans have three-year maturities.

While the loans from the sector provide some welcome diversification for lenders, they are fraught with regulatory risks that are making banks jittery.

"We can see that the government is stepping up restrictions, and we feel uneasy about how big the regulatory risks could be," said a banker.

In August, China's Ministry of Justice released draft regulations that, if implemented, would prohibit educational institutions from acquiring other not-for-profit schools. The share prices of some Hong Kong-listed Chinese education companies tumbled 30 per cent on average in reaction to the news.

"Educational firms listed overseas usually use the variable interest entity structure and rely on mergers and acquisitions to expand, which will likely be impacted by China's recently proposed rules," said a Hong Kong-based senior loans banker.

China's State Council in November also said kindergarten operators would be barred from selling shares, in a further blow to confidence in the sector.

And private tuition companies have come under attack from short sellers. Muddy Waters in June accused TAL Education of overstating its profits. TAL said it had reviewed the allegations and concluded that they were "baseless".

Against that backdrop, some bankers also questioned the rationale for the three companies' borrowings, given that they enjoy strong cash flows from tuition fees.

"We are not very clear about the purpose as those tuition fees are often paid upfront, and these companies do not usually need large amounts of working capital," said another loans banker.

China's education sector has been growing rapidly in recent years, with companies listing on stock exchanges and raising funds for expansion to ward off competition from new entrants into a lucrative market.

Private schools in China more than doubled their revenues from 2010 to 2016, while their penetration rate surged to 34.4 per cent from 23.9 per cent, according to a report from ratings agency Fitch in October.

Fundraising activity for private education companies has also accelerated, with as many as 10 IPOs in Hong Kong and the US completed in 2017, after the release of the amended law for promoting private education a year earlier.

"As the private educational sector in China becomes more competitive, driven by the rising middle class and increased urbanisation, large educational companies want to do IPOs or borrow to get a stronger hold on and increase their market share," said a Macau-based loans banker.

Some Chinese banks are still keen to lend to educational borrowers as they provide a diversification from conventional sectors such as property and financial services. Well-known names such as New Oriental Education, which has a long track record and strong reputation, appeal to lenders.

"New Oriental Education is very famous in China and has a presence in almost every city. We would love to lend to them as private education companies generally have low-to-moderate financial leverage, and their deals carry higher pricing than similarly rated credits," said a Hong Kong-based loans banker at a Chinese bank.

TAL Education's bullet loan offers a top-level all-in pricing of 200bp via an interest margin of 175bp over Libor, while New Oriental Education's loan pays a top-level all-in pricing of 180bp based on a margin of 165bp. OneSmart's deal offers the juiciest pricing among the three, paying a top-level all-in pricing of 300.2bp based on a margin of 270bp and an average life of 2.65 years.

For now, not everyone is concerned about the regulatory risks.

"We cannot predict how the government will change its policy towards the education sector in the future, so we will go ahead and join the deal first as there are currently no policy restrictions on tuition centres," said a banker at another Chinese lender. REUTERS