China Development Bank Pulls Back From Commercial Push; Bank Keeps Low Profile After Financing Some of Asia’s Biggest Deals

September 21, 2013, 10:27 p.m. ET

China Development Bank Pulls Back From Commercial Push

Bank Keeps Low Profile After Financing Some of Asia’s Biggest Deals

PRUDENCE HO

HONG KONG—China Development Bank Corp, the government-owned policy bank, made waves last year lending billions of dollars to private companies ranging from Alibaba Group Holding Ltd. to Hong Kong Exchanges & Clearing Ltd. 0388.HK +0.69% But after a high profile blowup in January when it tried to fund the sale of a stake in insurer Ping An Insurance 601318.SH -0.24% (Group) Co. of China, the bank has been noticeably absent from big deals this year. If this year is any indication, CDB’s move into going commercial, along the way financing some of Asia’s biggest deals, is over. Last year, investment bankers around the region said they often lost out to CDB, which could either afford to charge lower interest rates or could lend a huge amount of money. This year, CDB has kept its profile low.CDB began its life over two decades ago as one of three policy lenders that lent to state firms whose actions were aligned with government policy. A 10-year, $10 billion loan to Brazilian state-run oil giant Petroleo Brasileiro SA PETR4.BR -1.15% in exchange for 150,000 barrels of crude oil a day sent to China was a typical type of overseas loan. In funding acquisitions, money lent to Aluminum Corp of China to finance its 2009 purchase of a 9% Rio Tinto was another not unusual loan for the bank.

Then in June of last year, CDB came to notice for its commercial aspirations when it lent Alibaba US$2 billion in total that the e-commerce firm used to buy out its Hong Kong-listed trading unit as well as part of Yahoo Inc.’s stake in it. Months later, it funded most of the $2.2 billion the Hong Kong stock exchange forked out for the London Metal Exchange.

But by January, CDB’s short-lived role as lender for Thai billionaire Dhanin Chearavanont’s US$9.39 billion acquisition of a stake in the Chinese insurer Ping An Insurance (Group) Co. of China became the last of these kind of deals.

Mr. Dhanin’s purchase from HSBC Holdings HSBA.LN -1.39% PLC and the huge deal size—still the biggest completed M&A deal in Asia outside Japan so far this year, according to Dealogic—had already been in the headlines. But senior CDB officials grew skeptical about the transaction amid reports that Mr. Dhanin, a businessman who made his fortune selling frozen chickens, wasn’t the ultimate buyer of the stake in the giant life insurer. The reports proved false. Charoen Pokphand Group, which is controlled by Mr. Dhanin, denied the rumors and said it had nothing new to add. A Ping An spokesman said he didn’t have any more to add beyond a filing announcing the sale’s completion in February.

In fact, just weeks after HSBC disclosed CDB was Mr. Dhanin’s banker for the deal, the policy bank replaced Liu Hao, the head of CDB’s Hong Kong branch, with Han Baoxing, a senior official in CDB’s treasury and financial markets operations, people familiar with CDB said. Mr. Han declined to comment. Mr. Liu couldn’t be reached for comment. UBS AG ended up funding Mr. Dhanin’s purchase, according to people familiar with the matter earlier.

After the switch, CDB, which had set up its Hong Kong branch in 2008 as a base from which to expand outside China, stopped funding high-profile acquisition deals.

CDB wasn’t a lender on the US$4.7 billion sale to a Chinese consortium of AIG’s aircraft leasing arm, a deal which now looks near collapse. When the Chinese grouping was raising financing to buy International Lease Finance Corp., it approached the Hong Kong branch of CDB, according to people familiar with the situation. But CDB didn’t end up lending to the consortium, which fell apart and is now left with one buyer, Hong Kong private-equity firm P3 Investments. P3 continues to look for financing, although AIG has said that it may list ILFC should the Chinese purchase collapse.

In May, as Alibaba tapped banks for an US$8 billion loan, of which $2 billion was a refinancing of the CDB loans from last year, the Chinese policy lender didn’t take part. Instead, 22 banks took part in the loan, of which the only Chinese bank was Bank of China Ltd.’s 601988.SH -0.36% Macau branch. That absence was unusual as banks tend to be involved in the refinancing of their loans, to keep the interest rate coming in from the clients they already have a relationship with.

Again, in what is China’s biggest ever purchase of a U.S. company Smithfield Foods Inc., the $7.1 billion acquisition by China’s largest pork producer Shuanghui International Holdings Ltd, CDB didn’t take part. The acquisition by Shuanghui is being funded by Morgan Stanley and the New York branch of Bank of China Ltd. CDB also didn’t join in the stage when Bank of China syndicated its US$4 billion term loan to other interested banks. Two people familiar with the situation said, CDB may still come in when BOC sells on its loans in a general syndication process, but the Chinese policy lender’s role will be small.

To be sure, CDB hasn’t retreated completely outside China, though most of its big loans it makes are firmly state focused. It provided in April a €400 million (US$542 million) refinancing loan to Portugal’s power and gas operator, REN-Redes Energeticas Nacionais SA, after China’s State Grid Corp bought a 25% of stake in REN last year.

In February, CDB signed an agreement to provide China National Cereals, Oils and Foodstuffs Corp. with a 30 billion yuan (US$4.9 billion) credit facility to the state-owned food giant, safeguarding national food security, according to CDB news release.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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