After years of working with investment banks, China Hongqiao Group has discovered commercial firms can better meet its needs.
Source: REUTERS/Tyrone Siu
China Hongqiao Group sought the advice of investment banks three year ago for its Hong Kong IPO of US$2.2bn, but, since turning to the loan markets for funding, it has discovered that commercial banks offer competitive pricing and more efficient execution.
Hongqiao’s experience offers insights into how China’s big companies assess their funding needs as banks continue to clamour for roles in the world’s second biggest economy, even amid slowing growth.
Hongqiao, one of the largest private aluminium producers in China, continued to use investment banks after its 2011 IPO to sell a US$150m convertible bond and for two failed attempts to sell offshore bonds.
The Shangdong-based company, however, now finds that it prefers the offshore syndicated loan markets and it has obtained three offshore syndicated loans. In Hongqiao’s view, the loan market is better suited to commercial banks.
“At different stages, a company needs different types of services,” said Christine Wong, Hongqiao’s investor relations manager.
“We worked a lot with investment banks to bring the company public and to issue convertible bonds, but, when it comes to raising syndicated loans, commercial banks are better at it and are cheaper,” Wong said.
The company, which Zhang Shiping founded in 1994, mainly produces molten aluminium alloy.
Hongqiao is one of the lowest-cost aluminium companies in China as a result of its rising self sufficiency in obtaining alumina and electricity supply, according to a February Deutsche Bank research report.
The company has four bases in China with the capacity to produce 2.8m tons of aluminium, or 9% of China’s total capacity. The company also has a joint venture with two Indonesian partners to produce the metal.
As it has grown and gravitated to the loan markets, Hongqiao also has become better at figuring out which banks are the best matches.
“We value initial proposals, as well as the bank’s analyst report on the company,” Wong said. “We can tell if the bank takes us seriously by looking at the quality of those documents. If they contain only some big-picture macro analysis, then we can tell the bank didn’t do the homework.”
“At different stages, a company needs different types of services. We worked a lot with investment banks to bring the company public and to issue convertible bonds, but, when it comes to raising syndicated loans, commercial banks are better at it and are cheaper.”
Hongqiao appointed ANZ, Credit Agricole and Royal Bank of Scotland as mandated lead arrangers for its latest US$700m loan because of its positive relationships with them and the fact they offered the most competitive pricing.
The company is paying an all-in pricing of 410bp over Libor, much cheaper than the amount it forked out for JP Morgan-arranged syndicated loans.
“We like ANZ particularly because they have a speciality in serving commodity and metals companies,” Wong said. “They are aggressive and offer fast execution, and they are able to provide a full suite of services, including consulting.”
Hongqiao’s previous financing was a US$330m three-year commodity-linked syndicated loan, via lead JP Morgan, in January 2013. That facility, which will be refinanced with the US$700m loan, paid 455bp over Libor.
JP Morgan also arranged Hongqiao’s September 2012 three-year loan of US$500m, which paid an all-in of 501bp over Libor.
“For those two loans, we believe we paid higher than the market price because investment banks like JP Morgan [have a higher cost of funding relative to commercial banks],” Wong said.
The US$330m loan also was highly structured because of JP Morgan’s expertise in commodity-linked financing, according to Wong.
Under the structure, instead of cash, Hongqiao repaid the loan with aluminium ingots, based on the market price. The structure turned out badly for Hongqiao because it left the company with fewer ingots to produce molten aluminium alloy, its high-margin product.
The current refinancing is mainly to allow Hongqiao to get out of this complex arrangement.
Hongqiao believes that, while wanting to service clients, banks also have their own agendas. Wong has learned from years of dealing with banks and financial advisers that the company usually is best off making decisions on its own.
This became clear when Hongqiao tried to tap the bond market twice in the past two years to diversify its sources of funding, as well as to finance capital expenditures. It decided against doing a deal each time because investors were demanding yields of as high as 11.5%, too steep for Hongqiao’s liking.
Still, the company’s banks and financial advisers encouraged it to go ahead, Wong said.
In a bond offering, banks only get paid when a deal goes through. As such, they had an incentive to push a company to sell bonds, she said. Both Standard & Poor’s and Fitch rate Hongqiao Double B.
“We believe our company could issue a bond at a single-digit yield,” Wong said. “That’s why we decided [to go] against the bankers’ advice.”
Wong noted that, for DCM bankers, the market was always good, but the company had to be very cautious because, ultimately, it had to bear the risk.
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