Commentary on Political Economy

Monday, 23 November 2020


China’s Credit Stress Shines a Spotlight on Private Stock Deals

Bloomberg News
  • Companies have raised 321 billion yuan from deals this year
  • Deals offer financing alternatives amid credit market concerns

An increasingly popular fundraising tool in China is offering a potential lifeline for cash-strapped companies, as a string of high profile defaults tightens scrutiny of the country’s credit market.

Private share placements are booming after rules were relaxed in February, helping revive that form of equity financing. This year has seen 151 deals raise 321 billion yuan ($49 billion), the most since 2017, according to data compiled by Bloomberg. Private offerings have surpassed other equity-linked fundraising tools like public placements, rights issues and convertible bonds in volume. More than 500 private placements are in the pipeline, seeking to raise at least 709 billion yuan.

Such deals could offer financing alternatives for some companies amid concern over the health of distressed state-linked firms. China’s credit market has been roiled in recent weeks, triggering a selloff in bonds issued by weaker borrowers and prompting some to cancel debt sales.

Better Place

The volume of private placements picked up after rule changes in Feb.

Source: Bloomberg

“Defaults in the credit market may encourage lower-rated companies struggling to sell bonds to instead tap the equity market for financing,” said Alexander Yao, general manager at Roadshow Investment Co. in Beijing. His firm’s private-placement investment fund has gained 48% since inception in March, according to tracker Shenzhen PaiPaiWang Investment & Management Co.

Xiamen Unigroup Xue Co., a subsidiary of troubled Tsinghua Unigroup Co., rose as much as 6.6% on Nov. 3 after it said the China Securities Regulatory Commission told it to prepare for a hearing on its application for a private share placement of as much as 963 million yuan. Chongqing Lummy Pharmaceutical Co. jumped nearly 13% on Nov. 12 after receiving approval from the Shenzhen Stock Exchange for a roughly 1.1 billion yuan placement.

Such offerings allow listed companies to sell new shares at a discount to a group of investors, with the proceeds typically used for investment projects, debt repayment and replenishment of working capital. Companies like the structure because the sales’ private nature provide firms with greater freedom in setting prices and selecting investors. The discounts versus prevailing market prices appeal to money managers.

Private placements were a preferred tool for listed companies to sell additional shares, before regulatory concerns about a flood of new equity weighing on the nation’s stock market led to a crackdown in 2017. Regulators relaxed the rules in February to help increase corporate access to equity financing, as Beijing sought to cushion the impact of the pandemic on China’s slowing economy.

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