Bankers Brace for Chill in Helping Chinese Companies Buy Overseas

By Julie Steinberg Features Dow Jones Newswires

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.

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The regulator has told domestic lenders to examine the debt levels of several highflying Chinese conglomerates that data tracker Dealogic estimates have made around $60 billion in acquisitions overseas during the past few years, people with knowledge of the matter said. The list includes Anbang Insurance Group Co., which bought New York's Waldorf Astoria for nearly $2 billion; HNA Group Co., which invested $6.5 billion in the Hilton hotel chain; and Dalian Wanda Group, which bought Hollywood producer Legendary Entertainment for $3.5 billion.

Many bankers said the probe could further damp 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 fear the investigation will discourage cross-border deals done by companies of all sizes, and that some clients have already put deals on hold while they assess the situation. Deals that have been announced but haven't 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, said people who work in the deals world in Hong Kong.

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.

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HNA Group, for instance, said it had around $104 billion 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 complies with regulators in all the countries in which it operates.

"Many have been surprised at the amount 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 LLP. 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 investments overseas total $69.77 billion so far this year, versus $128.8 billion 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 is a "sanity check" for companies with complicated and opaque balance sheets.

Others say they hope to offset any loss of revenue from slowing Chinese deal-making by focusing on other business opportunities, such as helping Chinese companies go public in the U.S., or expanding M&A work elsewhere in the region.

Write to Julie Steinberg at julie.steinberg@wsj.com

(END) Dow Jones Newswires

June 23, 2017 10:02 ET (14:02 GMT)