After a series of scandals involving Chinese companies, one deal presented an innovative solution to the long-standing problem of security in offshore loans. For its unique structure and successful selldown, Shandong Hongqiao New Material’s US$500m financing is IFR Asia’s China Loan Deal of the Year.
Barely half a year after completing syndication of a US$200m debut offshore loan in February, Shandong Hongqiao New Material emerged in September with plans to replace the first facility with a US$350m three-year deal.
The new, senior secured loan had to cope with a tight loan market, with lenders cautious amid volatile market conditions and the backdrop of the lingering eurozone debt crisis. As a result, banks were less willing to lend to forge new relationships.
Adding to the challenge, Shandong Hongqiao, a wholly owned subsidiary of Hong Kong-listed China Hongqiao Group, is a privately owned enterprise with no state ownership or government affiliations, and a limited track record. The parent had only been listed in Hong Kong since March 2011, and recent efforts to launch a US dollar bond had fallen flat.
Co-ordinating arranger JP Morgan, however, introduced an innovative, commodity-linked structure that eased fears over structural subordination and security. The solution worked, and the deal was subsequently increased to US$500m after a solid oversubscription.
Shandong Hongqiao will repay the loan through the delivery of aluminium ingots to an offtaker. The offtaker will then deposit into an onshore escrow account, which will remit monthly payments to service the loan.
The deal is structured to allow offshore banks to lend directly to an onshore Chinese borrower, thus avoiding the risk that offshore lenders become structurally subordinated to the company’s onshore banks.
It was a departure from the classic offshore-holdco structure that foreign lenders are more used to when dealing with Chinese borrowers.
It also improved on Hongqiao’s earlier syndicated loan by moving the incremental debt from the offshore listed company to the onshore operating company, where it could be serviced better.
Shandong Hongqiao’s facility was tightly structured with covenants that limit leverage and excess cash outflow, including a maximum total debt-to-Ebitda ratio, a maximum onshore debt-to-Ebitda ratio, a minimum onshore current ratio, a minimum interest coverage ratio, and a debt service coverage ratio.
At the same time, the offtake contract comes with an adjustment option that provides the company with more operational flexibility, albeit not at the expense of lenders.
JP Morgan China Commodities Corp, the sole offtaker, was of sufficiently high credit quality that no backstop offtakers were required.
Moreover, despite the three-year maturity, the amortising loan comes with an average life of 1.75 years – a tenor that increased its appeal to lenders booking the client for the first time.
The facility, which comes with a guarantee from the parent and certain offshore units, is secured against shares, a pledge over the account receivables under the offtake contract, an account-control agreement related to onshore escrow account, and assignment of rights under the offtake contact.
The loan was priced at a top-level all-in of 501bp via a margin of 330bp over Libor.
The result of this innovative structure was an oversubscription involving 11 banks – an improvement on the earlier facility’s eight – which led to the increase in deal size and no general syndication needed.
The 11 include mandated lead arrangers and bookrunners China Minsheng Bank, First Gulf Bank, ABN AMRO Bank, Cathay United Bank, Credit Agricole CIB, ING Bank and JP Morgan. Wing Lung Bank, Korea Development Bank, China Development Industrial Bank and UOB came in as MLAs.
Six of these lenders were new to the borrower, committing over US$300m combined and helping Shandong Hongqiao expand its banking relationships.
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