Bankers are quickly getting acquainted with the latest powerhouse for European M&A — the Chinese state-owned enterprises.
This year alone has seen a run of deals from one highly acquisitive enterprise in particular, China National Chemical Corporation, aka ChemChina.
In 2016, ChemChina has announced plans to buy German firm KraussMaffei, 12% of Switzerland-headquartered Mercuria and Swiss company Syngenta. It is also refinancing its loan to buy Italy's Pirelli.
It is raising $50bn in loans to buy seed maker Syngenta and is leaning on international banks for part of the funding.
ChemChina will borrow $30bn of the total in its own name, in an Asian loan syndication led by China Citic Bank.
But $20bn is being raised outside China in a loan with an unusual structure.
The loan has no guarantee from ChemChina and is being issued by a bid company which relies on a dividend stream from Syngenta. HSBC is leading the $20bn deal.
ChemChina also used the non-recourse format last year to acquire Italian tyre maker Pirelli. The €6.8bn Pirelli loan is being refinanced at the moment.
The non-recourse structure is commonplace in leveraged loans, but for the Chinese deals it is crucial to give lenders the confidence to lend to opaque state enterprises without taking on the risk of the unknown.
Chinese whispers
The famously secretive state-owned enterprises look like a credit evaluation nightmare. The firms do not willingly share information on their earnings and creditors also face the risk that Chinese courts may not support a foreign claimant in the case of an insolvency.
One loans head said that European banks are wary, even at times afraid, of dealing with the secretive Chinese entities. “There is still a lot of prejudice, some fair and some unfair,” said one head of loans.
ChemChina shared the bare-minimum information with banks participating in the $20bn non-recourse Syngenta loan and did not share any information with those banks about the $30bn recourse loan.
But nonetheless, banks are keen to participate in ChemChina’s non-recourse Syngenta loan, according to bankers.
“There are a lot of questions being asked about the Syngenta loan, this is a good sign,” said one lead banker.
GlobalCapital understands that some banks declined to participate in the top level. Those which declined may have reached their country limits for ChemChina loans given its various acquisitions this year.
But certain banks are keen to participate in any acquisition financing, against the backdrop of an otherwise quiet European M&A market.
Make it work
One reason bankers are confident that ChemChina’s loans are a reliable investment is because the borrower needs to guarantee a successful deal, since they will be coming back to Europe for more acquisitions.
“The Chinese are looking to acquire more technology for the growth of their country,” said a third banker. “They cannot afford not to let this go well, this is not the last time they are going to do this in Europe.”
As long as the Chinese continue to use the non-recourse loan format when asking for funding from international banks, the deals can continue with gusto.
But the state-owned enterprises will have to start reporting their earnings and securing credit ratings before international lenders feel completely safe to lend to them directly.
The first banker explained that the set-up would not change any time soon: “Reform needs to be pushed much further to gain the confidence of the international banks to finance on a recourse basis. The mutual trust needs to be developed... nothing that will happen overnight.”