STF upturn in China

The past twelve months has seen a real upturn in structured trade finance (STF) in China, writes Trevor Clark*, with a number of notable transactions taking place.

Much of this activity has been driven by two key factors:

i) The efforts of mainland state-controlled enterprises (SOEs) to secure long-term energy resources offshore; and
ii) a significant increase in transactions financing exports from China, involving either direct financing provided by the Export-Import Bank of China (China Exim) or political/commercial risk insurance from Sinosure.

The push by mainland SOEs to secure long-term energy supplies has been at the forefront in the past 12 months or so. First, we saw the bid by CNOOC for Unocal, which was not permitted to proceed in the US, followed by the acquisition by CNPC of PetroKazakhstan, the Canadian listed company whose assets predominantly consist of oil and gas reserves in Kazakhstan.

One transaction Linklaters was involved in, acting for the arranging banks (including Calyon), demonstrates how this trend has fuelled the structured trade finance activity of the firm. In the fourth quarter of last year, the $3bn structured oil receivables financing for a Hong Kong affiliate of Sonangol, the Angolan oil parastatal company, was signed.

Sonangol has been a frequent visitor to the international debt markets over the years, raising finance backed by oil contracts with a series of oil majors, with Linklaters often advising the arranging banks on these transactions. The differentiating feature of the latest deal is that, as well as the transaction being structured and documented under Hong Kong law (a first for Sonangol transactions), the oil major which entered into the long-term oil supply contract was Unipec, a subsidiary of Sinopec. Syndicated in both Europe and Asia, the financing was a huge success (as indicated by the increase of the original deal amount by almost 50% following oversubscription in syndication).

The second trend driving PRC trade financings is the increase in use of China Exim and/or Sinosure support for exports by PRC manufacturers. There has been significant activity in the area, particularly in the container and telecoms sectors. 2005 definitely saw China Exim (which provides direct financing) and Sinosure (which provides insurance cover), rising to prominence and being extremely active.

A transaction on which Linklaters advised Citigroup as arranger (a joint effort involving the London and Hong Kong branches of both Citigroup and Linklaters) was the £150m ($260.64m) financing for GE SeaCo (a joint venture between GE and Sea Containers). To support the purchase of container boxes by GE SeaCo from a PRC manufacturer, China Exim provided a secured financing facility direct to GE SeaCo. A group of banks, coordinated by Citigroup, provided a partial (40%) risk guarantee to China Exim. Linklaters devised a co-financing structure, which addressed the requirements of both China Exim and the bank guarantors. Again, the deal was successfully received in the market.

There has also been plenty of activity in Sinosure-supported financings. A relatively unknown entity on the international scene as recently as two years ago, a number of Sinosure-supported deals have now closed. We’ve advised a number of banks, which had no history of dealing with Sinosure, on their first Sinosure-covered financings. This often involved advising the banks on the scope of the policy coverage and the legal status of Sinosure and the implications of relying on a policy governed by PRC law (usually opting for arbitration for any enforcement). The extent to which Sinosure carries the full faith and credit of the state and its capital/funding base as well as its relationship with the ministry of finance are other key issues for most banks.

Many of the Sinosure-supported financings we have advised on involved the export of telecoms equipment by the likes of ZTE and Huawei, under Sinosure’s buyer credit policy. Often, exports are to the developing world, such as southern or western Africa, where PRC telecoms equipment is gaining a large market share. We have also advised lenders on financings supported by Sinosure’s investment policy division, which covers financings to offshore subsidiaries of PRC entities. Many of these transactions are bespoke bilateral deals and tend to have an offshore energy purchase element similar in this respect to the support given by Nexi to Japanese energy acquisitions.

This upturn in structured trade finance activity in the PRC is a trend we see as only set to continue.

*Trevor Clark is a partner in the Hong Kong office of Linklaters