While the White House is busy navigating through the ongoing trade tensions with China, top Wall Street banks are throwing billions of dollars at Chinese tech unicorns hoping for lucrative returns.
China is the next tech hotspot
Chinese companies are dominating the tech space while US-based highly valued startups like Uber are still losing money. Wall Street heavyweights like Goldman Sachs Group and Morgan Stanley are now looking for offshore growth. They recently helped Bytedance Ltd. borrow a whopping $1.3 billion. The company is behind the global video sharing sensation TikTok app. They are raising about $1.4 billion for two other Chinese tech companies. Interestingly, these borrowers had avoided the syndicated loan market.
These banks are hoping that these loans will eventually lead to lucrative events like initial public offerings, just like Uber in the US. However, with the trade issues worsening between the two nations, investors are concerned about lofty valuations. The trade war has already hit the tech industry with Google breaking its ties with Huawei and Facebook, announcing that its apps will not come preloaded on Huawei devices.
The numbers behind the deals
Banks earned 145 basis points over the benchmark on average by providing five-year syndicated loans to Chinese companies. The follow-on services to these borrowers like equity issuance are bringing even more noteworthy fees. Underwriters are charging as much as 5% to 6% of the float value in the debut share offering in the US. The fee goes down to 2% to 3% in Hong Kong. Bloomberg’s data suggests that the fees could be lower if the offerings are significantly large.
Benjamin Ng, head of Asia Pacific debt syndicate and acquisition finance at Citigroup Hong Kong, said that the leverage on these loans is low, but the returns are acceptable. There are cross-sell opportunities in the future as well, which includes both trade financing and future capital markets. Morgan Stanley, for instance, earned $41 million from Uber’s IPO after arranging for a $1.1 billion loan for the company. Goldman, on the other hand, provided a $600 million debt to Dropbox about a year before the company went public.
Vey Sern, Hong Kong based Bloomberg Intelligence analyst said that banks are getting comfortable in lending to asset-light companies. As competitors are lending to these billion-dollar startups, banks are also encouraged to jump into space. According to reports, both Morgan Stanley and Goldman Sachs are currently facilitating a $1 billion loan for a China-based online property brokerage called Beike Zhaofang.
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