Borrower Briefing

Oct 28, 2016 - been approached by Chinese banks, notably Bank of ... China Merchants Bank and ICBC. But Chinese .... Kai Preugschat departs Berne Union.
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28 October 2016

Borrower Briefing Chinese banks out with cheap offerings for Asia's commodities traders The rapid expansion of Chexim and Sinosure's influence in the Asian export finance market may yet be mirrored by Chinese banks in the lending market for Asian commodities traders – particularly those based in the region’s commodities trading hub Singapore. Signs are that Chinese banks are looking to expand their commodities-linked lending. A number of Singapore-based trading companies have recently been approached by Chinese banks, notably Bank of China International and Industrial and Commercial Bank of China (ICBC), with what borrowers claim are highly competitive rates. Chinese lenders are not totally new to the sector (see chart). For example, six of the seven mandated lead arrangers and senior bookrunners on Cofco Agri’s $2.6 billion revolving credit signed in September were Chinese - Agricultural Bank of China, Bank of China, China Construction Bank, China Development Bank, China Merchants Bank and ICBC. But Chinese banks have tended to take non-coordinating rolls – ABN Amro coordinated the Cofco Agri deal despite the borrower being a subsidiary of Chinese state-owned Cofco International – and lending has been restricted to China-owned traders. Cheap Chinese short term debt will be good news for Asia’s commodity-linked borrowers, for whom the cost of short-term working capital is key to their overall margins, particularly given the global slump in commodities prices. And the typical problems associated with Chinese loans in the export finance market – that they are tied to either Chinese manufacturing content or Chinese offtake contracts – do not apply. Furthermore, although the Chinese banks do not have the operational expertise of international lenders, the short-term tenors and relatively simple financial engineering in commodities working capital facilities significantly limit the potential for problems caused by lack of experience. For the major commodities traders – Gunvor Singapore, Olam International and Mercuria Asia for example – a Chinese bank offering would have to be priced at a major discount to take business away from international lenders, especially given international banks have largely stuck with the major commodities traders at realistic rates despite the unpredictability in the borrowers’ markets. But for second-tier borrowers, Chinese debt is worth consideration given pricing is rumoured to be in the 100-150bp over Libor range, which at a conservative estimation is around 100bp lower than the same borrowers would get from international banks. To see more coverage of trade finance activity in Asia, or to access our market-leading database of verified trade finance transactions, click here to take a complimentary trial of Trade Finance Analytics.

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