Abundant liquidity and limited activity has led to a fall in pricing across most segments, and smaller borrowers in China are no exception if two recent deals are anything to go by. A loan for Hong Kong-listed Golden Eagle International Trading that started out at $500m is likely to wind up at $700m, despite a credit rating downgrade by Fitch (see separate story).
And more recently, Hong Kong-listed Xinyi Solar, a photovoltaic glass manufacturer, has brought an HK$2bn ($257m) amortising loan into the market, offering a top level all-in of 220bp in general for a three year tenor.
“When we first heard about a potential loan [by Xinyi], we thought pricing would be wider,” said a banker who covers Hong Kong syndications. “This is going to be a test of market appetite for a mid-cap name in a sector like solar. I haven’t seen this kind of pricing for a private sector mid-cap in quite a while.”
Looser structures
As the Xinyi loan only launched last week, market participants believe it is too early to determine how it will fare. But its security package, which consists of a guarantee from parent Xinyi Glass, has come in for criticism by some market participants.
This is because a cover from an agency, or security over plant and equipment, would have been more comfortable for lenders, said a Hong Kong-based banker considering the loan. He cited the recent fundraising by Greenland HK that was backed by a guarantee from China Export and Credit Insurance Corporation, as an example of a more robust structure.
Security for the Golden Eagle loan also consists of a guarantee from its Hong Kong-listed parent, which is Golden Eagle Retail. The deal also has a first share charge on offshore subsidiaries of the company, a fixed charge on the company’s dividend account and reserve account, and subordination and assignment of inter-company debt.
While this sounds pretty robust, a banker close to the trade said such a security was fairly normal for offshore loans for Chinese companies.
“It’s a pretty standard security package for an offshore loan,” he said. “The assets are all in China, even with the share pledge. So the security is related to only the special purpose vehicles [as opposed to hard assets].”
Bankers agreed that the rise in popularity of quality small to mid-cap names out of China is here to stay, because at present the market is driven more by demand than supply.
“It’s a borrowers' market in terms of structure and pricing,” said a senior loan syndicate banker. “This is a time they are pushing for looser structures and while I can’t opine on the pricing for Xinyi specifically, intuitively it sounds low.”
The banker close to the Golden Eagle trade also said the success of the deal was as much a result of less competition from other deals as the company’s fundamentals. This is why banks flocked to it, unperturbed by the credit rating downgrade.
Asian relationships
Despite the debate surrounding pricing for Xinyi, some bankers refrained from labelling it a potential benchmark, as the nature of the relationship-driven Asian market made it difficult to have a one-size-fits-all template when setting loan terms.
“Mid-cap pricing is a tricky one,” said a second banker also based in Hong Kong. “It depends on the company. Asian liquidity is different from US and Europe. Those markets are very big and can have benchmarks.
"Here, a company with the same credit profile and similar financials that doesn’t have strong existing relationships with banks would not be able to get lower pricing. If it’s new, it may need to pay a premium.”
The banker on Golden Eagle pointed out that parent Xinyi Glass was a familiar name in the market, having carried out offshore loan syndications before, and so the deal could generate adequate demand, price and security notwithstanding.
Moreover, it’s no secret that banks are not sector-agnostic when it comes to companies operating in the Chinese copper or property space, he said. These borrowers would need to cough up more, irrespective of the broader downtrend in pricing, because of poor economic conditions affecting industries like industrial metals and property.
“China policy is against certain industries and the China Banking Regulatory Commission has made some announcements on this," he said. "In onshore, companies in those industries will find it very difficult to get financing, so they head offshore, where they will have to pay up.”