Buyout giant Kohlberg Kravis Roberts is nearing completion of its first China purchase after raising 3 billion yuan ($400 million) in loans from mainland Chinese banks - a structure that may set a precedent for getting deals done in a difficult Chinese private equity market.
KKR is reportedly buying 44 per cent of Chinese cement maker Tianrui Cement Co. Ltd. alongside the International Finance Corp. (IFC), the private sector arm of the World Bank, which is acquiring a five per cent stake for up to US$30m and making loans to the company.
The deal’s unusual structure, put together by JPMorgan has bankers excited, given the hard time buyout firms such as Carlyle Group have had getting deals done in China. "We certainly consider this a positive development ... We should see more of these transactions in the future," said the head of leverage finance at a European bank in Hong Kong.
It marks the first time that mainland Chinese banks have been tapped to refinance a company’s debt in yuan in conjunction with an investment from a buyout firm. The 5-year loan is secured by the assets of the company and most of the lenders are Chinese banks, including China Construction Bank
Typically, private equity firms buy companies using a little of their own equity and a lot of loans secured by the target company’s assets. That model has been extremely difficult in China, partly due to lending restrictions on foreign banks. The handful of Chinese buyouts to date have only managed to raise a limited amount of debt in dollars via offshore holding vehicles.
"Chinese companies expect to grow quickly, so there will be more opportunities to leverage them to help them grow by acquisition or organically but we still have to be careful because of a lack of transparency sometimes."
The loan being raised in conjunction with KKR’s investment will be used to shore up the finances of Tianrui, which expects to be a buyer amid a planned consolidation of China’s crowded cement industry, and is separate from KKR’s equity investment.
Even though KKR’s Tianrui stake is in the minority, it has negotiated veto rights over key decisions that could derail its investment thesis, such as incurring more debt on onerous terms or acquisitions it deems unprofitable in the long term. Other foreign buyout firms in China are seeking similar rights.