A bridge to the outside world

Private debt funds have found an opportunity to help Chinese firms complete overseas acquisitions.

It was no coincidence that the largest overseas M&A deal completed by a Chinese firm last year (by some margin) was ChemChina’s $43 billion takeover of Switzerland’s Syngenta. This, after all, was an agriculture deal – a sector where the Chinese government appreciates the benefits of strategic overseas expansion, and which is not therefore subject to the country’s capital controls.

The latest version of regulations on outbound investments, released just over a week ago, continue to favour agriculture along with other sectors such as technology, oil, mining and those promoting the ‘Belt and Road’ development strategy. All these are within the “encouraged” category, effectively giving the green light for Chinese firms to pursue overseas purchases free from regulatory interference.

Other sectors are less in favour, including the entertainment industry. In April, Dalian Wanda co-founder Wang Jianlin blamed a tougher capital controls environment for his firm’s failure to complete the planned $1 billion acquisition of Dick Clark Productions, the US entertainment production company. In areas such as the military and gambling, deals are banned outright.

But in many other sectors – which are neither approved nor disapproved – transactions are subject to investigation by the State Administration of Foreign Exchange and are in a kind of regulatory limbo. In situations where private debt funds are confident that SAFE approval will ultimately be given, they are frequently providing bridge finance as a form of regulatory relief.

“This happens when a private debt fund is confident the buyer has met all the regulatory requirements for the financing and the money is just trapped in SAFE but will eventually come out of China for the intended purpose,” Jolyon Ellwood-Russell, a partner at law firm Simmons & Simmons, tells PDI.

In the more complex deal environment that China has become as a result of capital controls, private debt funds are making friends among the borrower community for their flexible underwriting and ability to extend security beyond traditional collateral. These characteristics mean it is not only because of overseas bridge lending that they find themselves gaining market share.

“There is a combination of reasons and capital control is just one of them,” says Barry Lau, co-founder and managing director of Chinese alternative credit specialist Adamas Asset Management. “Private debt funds are here because of the banks’ inability to lead in special situations and complex structuring transactions.”

In a private debt context, many have identified the Chinese opportunity as one relating to the banks’ problems with distressed debt. In fact, this has turned out to be a slow-burner due to buyers’ inability in many cases to match sellers’ price expectations. Perhaps a bigger opportunity is emerging through a theme that has become familiar in North America and Europe – namely, supporting the growth of firms that find their traditional lending relationships in the banking community becoming increasingly strained.