Chinese appetite for overseas deals may wane

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Global bankers are bracing for a further chill in what had been one of their juiciest businesses — helping Chinese companies acquire overseas — following news that China’s banking regulator is probing some of the country’s biggest deal makers.

The regulator has told domestic lenders to examine the debt levels of several high-flying Chinese conglomerates that data tracker Dealogic estimates have made about $US60 billion ($79bn) in acquisitions overseas during the past few years.

The list includes Anbang Insurance, which bought New York’s Waldorf Astoria for nearly $US2bn; HNA Group, which invested $US6.5bn in the Hilton hotel chain; and Dalian Wanda, which bought Hollywood producer Legendary Entertainment for $US3.5bn.

Many bankers said the probe could further dampen Chinese companies’ appetite for investments abroad, which had already taken a hit after regulators worried about capital flight tightened oversight of big deals at the end of last year.

Some bankers said they feared the investigation would discourage cross-border deals done by companies of all sizes, and that some clients had already put deals on hold while they assessed the situation. Deals that had been announced but had not closed yet may run into trouble with regulators, one banker said.

Another concern is that if Chinese banks, which account for a large proportion of the financing for Chinese companies’ overseas deals, slow or curb their lending, that will hurt investment activity as well.

The recent probe follows a crackdown on excessive leverage by Chinese regulators who are concerned that ballooning debt levels could slow the economy and threaten the financial system. Since many big Chinese conglomerates are privately held and don’t disclose much, it is tough to assess just how much debt they have.

Still, bankers and data trackers say the most aggressive acquirers appear to be highly leveraged.

HNA Group, for instance, said it had around $US104bn in debt at the end of last year, which would give it a high debt-to-earnings ratio.

HNA said the group “is in a sound financial and operational situation” and fully complied with regulators in all the countries in which it operates.

“Many have been surprised at the amount of debt these conglomerates have been able to take on and the willingness of Chinese banks to lend,” said Michael DeSombre, a Hong-Kong based partner at Sullivan & Cromwell.

The regulator’s actions are a “a natural follow-on in terms of things getting out of hand with large-scale leverage and willingness to go buy things”.

China’s outbound deal volume, which hit a record last year, has already slumped following the tightened capital controls implemented at the end of 2016. Chinese deal-makers announced overseas investments of $US69.77bn so far this year, versus $US128.8bn a year earlier, according to data from Dealogic.

Bankers say some of the more outlandish deals, or those that don’t align with the buyer’s core businesses, haven’t been coming to market since December.

Some bankers applauded the move to investigate the prominent Chinese deal-makers, saying such scrutiny would help overhaul a debt-ridden system that could be exposing banks to trouble. One banker said he was surprised regulators hadn’t acted earlier, and that the current exercise was a “sanity check” for companies with complicated and opaque balance sheets.

By JULIE STEINBERG
The Wall Street Journal

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