Buying overseas, Chinese conglomerates leverage offshore assets for financing

Julie Zhu

* Chinese firms raising offshore bonds, loans to do deals

* Chinese companies raised $60bln offshore bonds Dec-March

* Some firms say curbs give them edge over more domestic

rivals

* Some bankers warn of risks as deals lead to more leverage

HONG KONG, April 28 (Reuters) - Chinese conglomerates, still

eager to snap up assets abroad, are rushing to raise money

offshore in order to get around capital outflow curbs that have

made it much tougher for Chinese bidders to complete outbound

mergers and acquisitions.

Acquisitive Chinese conglomerates - including Fosun

International, WH Group and China Everbright -

that can use offshore assets to raise capital outside China say

the curbs are working to their advantage by deterring potential

rival bids from more domestically-focused Chinese companies that

have fewer options for raising funds overseas.

"Some Chinese companies have missed out on overseas

opportunities due to lengthy regulatory processes at home, but

if you can raise U.S. dollars and invest in dollars too, you

would not be shackled by regulatory and forex issues," said Chen

Shuang, CEO of China Everbright Limited, the Hong Kong

investment arm of state-owned China Everbright Group.

Chinese bidders spent a record $105 billion on assets

ranging from movie studios to football clubs in 2016 but over

the past six months Beijing – in a bid to prop up the flagging

yuan – has cracked down on companies taking money offshore to

buy non-core assets.

This hasn't stopped China's conglomerates, who remain hungry

for overseas purchases.

They have been leveraging a range of overseas assets,

including listed subsidiaries, privately-held affiliates and

insurance cash, to raise capital from equity and bond issuance,

as well as loans offshore, bankers and executives at these

groups said.

Chinese companies issued 93 offshore bonds worth about $60

billion from December 1st to March 2017, three times the amount

raised over the same year-ago period, according to Thomson

Reuters data - largely to fund deals, say bankers.

Fosun has been among the most active companies, raising $1.4

billion in offshore bonds since March via its British Virgin

Islands entity Fortune Star Ltd.

The conglomerate has said Beijing's capital controls are a

challenge, but it continues to have several means of financing

overseas transactions.

"We definitely have to make good use of our Hong Kong-listed

platforms which could offer us a number of means for

fundraising, including bonds and syndicated loans," Chen Qiyu,

co-president of Fosun said in an interview, referring to the

fact the group has several Hong Kong-listed subsidiaries.

LATE TO THE PARTY

Likewise, Chinese tech behemoth Tencent last month inked a

$4.65 billion offshore loan in order to finance more

deals,, while other Chinese companies such as WH

Group can draw on dollar revenues generated by overseas

subsidiaries.

Wan Long,chairman of WH Group, said capital restrictions

were not a concern for him as nearly 60 percent of the group's

revenues are derived from the United States following its $4.7

billion takeover of Smithfield Food Inc in 2013.

"As a global company, we are not worried. We have revenues

in foreign currencies which can flow freely. But for Chinese

firms which have just started to go global, it will be difficult

for them."

Bankers said they had grown reluctant to deal with Chinese

purchasers that do not have overseas capital.

When Tencent formed a consortium to snap up European game

developer Supercell for $8.6 billion last October, it chose

several Chinese investors with ample cash overseas. They

included China CITIC Bank Corp and bad debt manager

China Cinda Asset Management.

One person involved in the consortium said Tencent did not

even consider bringing onboard Chinese investors that did not

have offshore funds to hand because the deal had to move fast.

Tencent didn't respond to a Reuters request for comment.

According to Sam Sun, greater China head of AGIC Capital, an

Asian-European private equity firm, capital curbs could also

benefit Chinese buyers with offshore money by lowering prices

for assets due to less competition from domestic rivals.

“Last year we saw a lot of Chinese funds and buyers going

overseas and there was a concern in the market because it would

inflate the price artificially,” he said. “Capital controls have

made people think more rationally what they really want to

acquire. That did reduce competition in a good way."

But some bankers privately warned of rising risks for

increasingly-leveraged Chinese conglomerates that continue to

use new assets to raise yet more finance in order to carry on

their overseas shopping spree.

“It's a big risk," said one banker of such types of deals.

"If any of its (the buyers') leveraged overseas units become

shaky due to whatever reasons then it would set off a chain

reaction. The financial strength of the underlying overseas

assets is very critical."

Aviation-to-property group HNA Group which has

been aggressively snapping up global assets, for example has

pledged newly-acquired entities as collateral to help fund the

next purchase, according to people who have advised on its

overseas deals.

Late last year, its Irish subsidiary Avolon, which it

acquired in 2015, raised a $8.5 billion loan mainly from Morgan

Stanley and UBS, to help back its $10 billion takeover of the

aircraft-leasing business of New York-based CIT Group, Thomson

Reuters publication IFR reported.

A spokeswoman for HNA declined to comment.

(Reporting by Julie Zhu; Additional reporting by Sumeet

Chatterjee in Hong Kong; Editing by Michelle Price & Simon

Cameron-Moore)