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Spotlight on private stock deals in China


AN INCREASINGLY popular fundraising tool in China is offering a potential lifeline for cash-strapped companies, as a string of high profile defaults tightens scrutiny of the country's credit market.

Private share placements are booming after rules were relaxed in February, helping revive that form of equity financing. This year has seen 151 deals raise 321 billion yuan (S$65.5 billion), the most since 2017, according to data compiled by Bloomberg.

Private offerings have surpassed other equity-linked fundraising tools like public placements, rights issues and convertible bonds in volume. More than 500 private placements are in the pipeline, seeking to raise at least 709 billion yuan.

Such deals could offer financing alternatives for some companies amid concern over the health of distressed state-linked firms. China's credit market has been roiled in recent weeks, triggering a selloff in bonds issued by weaker borrowers and prompting some to cancel debt sales.

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"Defaults in the credit market may encourage lower-rated companies struggling to sell bonds to instead tap the equity market for financing," said Alexander Yao, general manager at Roadshow Investment Co in Beijing. His firm's private-placement investment fund has gained 48 per cent since inception in March, according to tracker Shenzhen PaiPaiWang Investment & Management Co.

Xiamen Unigroup Xue Co, a subsidiary of troubled Tsinghua Unigroup Co, rose as much as 6.6 per cent on Nov 3 after it said the China Securities Regulatory Commission told it to prepare for a hearing on its application for a private share placement of as much as 963 million yuan. Chongqing Lummy Pharmaceutical Co jumped nearly 13 per cent on Nov 12 after receiving approval from the Shenzhen Stock Exchange for a roughly 1.1 billion yuan placement.

Such offerings allow listed companies to sell new shares at a discount to a group of investors, with the proceeds typically used for investment projects, debt repayment and replenishment of working capital.

Companies like the structure because the sales' private nature provide firms with greater freedom in setting prices and selecting investors. The discounts versus prevailing market prices appeal to money managers.

Private placements were a preferred tool for listed companies to sell additional shares, before regulatory concerns about a flood of new equity weighing on the nation's stock market led to a crackdown in 2017.

Regulators relaxed the rules in February to help increase corporate access to equity financing, as Beijing sought to cushion the impact of the pandemic on China's slowing economy.

At that time, the CSRC doubled the allowable maximum discount to 20 per cent for placement shares, shortened the lock-up period to no less than six months from 12, and expanded the maximum number of investors to 35 for each placement. Previously, companies were restricted to 10 investors, while those listed on the ChiNext board could have only five.

Since those changes, the average return after the six-month lock-up period for the deals has improved to 29 per cent from 25 per cent last year, according to data compiled by Bloomberg.

To be sure, the booming private-share placement market doesn't mean China's vast number of cash-strapped companies can all find financing.

The method is only possible for listed firms, and investors confronted with a growing supply of additional shares will likely be increasingly selective when it comes to companies with heavy debt burdens - despite big discounts offered by issuers.

"It will definitely be a big positive if these cash-strapped companies can raise money from the equity market," said Chen Yicong, managing director at Beijing Chengyang Asset Management Ltd. "But it's not certain whether companies viewed as problematic can attract enough investor demand." BLOOMBERG

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