(Bloomberg) — Bohai Leasing Co. needed to find $2 billion fast, after a bond sale stalled and banks balked at demands for a loan.
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A plan to sell junk notes in late 2023 with an 11% coupon didn’t go ahead due to market volatility. This summer, some banks turned down loan requests from the aircraft- and container-leasing firm. Meanwhile, talks with private equity firms had hit a snare.
Bohai’s travails showcase the difficulties facing China’s distressed firms after a yearslong meltdown in the nation’s high-yield bond markets. Dozens of defaults had crimped risk appetite, with the promise of high coupons no longer enough for bond investors. For private credit, the returns didn’t justify taking long-term risks, leaving troubled borrowers facing a lack of options to secure funding.
A solution for Bohai emerged just weeks before a September repayment deadline. RRJ Capital, an Asian investment firm focused on private equity and also active in private credit, provided a $1 billion loan. Meanwhile, Morgan Stanley helped sell $1.1 billion of dollar bonds. The combination of private and public markets, pieced from accounts by people familiar with the negotiations, may serve as a potential roadmap for other stressed firms.
“It would have been quite tricky for Bohai Leasing without a public-private market arrangement,” said Gary Ng, a senior economist at Natixis SA in Hong Kong. “The core reason is it may not be as easy to pitch the refinancing demand to public debt investors due to the ongoing worries about credit risks.”
The deals paid dividends straight away for Bohai, and its unit Global Aircraft Leasing Co.
The cash was provided via special-purpose vehicles of RRJ, which says on its website that it has close to $15 billion of total assets under management. The money was injected into Global Aircraft Leasing, lowering its debt-to-equity ratio. That allowed Morgan Stanley to go ahead with a dollar-bond sale with a coupon of 8.75%, compared with the 11% in the proposed October offering. Moody’s assigned a Ba2 rating to the debt, and raised the unit’s outlook to stable from negative.
“Having access to the private-credit market gives high-yield borrowers another pathway to raise funds, which is a positive development for public-credit investors and borrowers alike,” said Pri de Silva, a senior credit analyst at Bloomberg Intelligence in Hong Kong. “This transaction could be a blueprint for some borrowers with limited access to public markets.”
Bohai Leasing, the Shenzhen-listed arm of failed conglomerate HNA, has been tussling with liquidity pressures. It failed to repay a total of 2 billion yuan ($281.6 million) of onshore debt on time as of late June, according to a company report in August. The firm is negotiating a debt extension and a restructuring arrangement with the lenders and creditors, the report added.
The company and its Global Aircraft Leasing unit didn’t respond to requests for comments for this story. RRJ Capital and Morgan Stanley declined to comment.
Tough Summer
When Bohai Leasing knocked on the doors of financial institutions throughout the summer, around half a dozen passed on the private loan deal of $1 billion to $2 billion. One banker was worried the company’s loan-to-value ratio would rise to between 60% to 70%, while others expressed concerns about the financial pressure faced by the company, according to people familiar with the situation. All spoke on the condition of anonymity as they weren’t authorized to speak on private matters.
China had been an integral part of Asia’s private-lending market, but an unprecedented property debt crisis that led scores of firms into default has put off many investors. Meanwhile, with lower borrowing costs in a country fighting a slowdown, private credit lenders have struggled to find enticing deals.
Issuance in the junk dollar bond market has also slowed. Chinese firms sold 59 such notes this year as of Sept. 12, a slight uptick from last year, when 52 bonds were sold in the lowest issuance in 11 years, according to data compiled by Bloomberg.
“Unless there is a policy incentive to fund distressed firms such as policy loans supporting SMEs and special loans to support property developers, it may be difficult to secure loans,” said Lynn Song, Greater China chief economist at ING Bank N.V., Hong Kong Branch.
For all its struggles, however, Bohai was seeing its profit improve. Its latest filing showed its net profit for the first six months of 2024 jumped 36%, thanks to a recovery in the global aviation industry.
By late July, Bohai was in talks with a number of Asian private equity firms, including RRJ and Seoul-based MBK Partners Ltd., to refinance all the amount, people familiar with the matter said earlier.
A key discussion point was Bohai’s demand for a three-year loan, to tide over the time needed to get cash from selling Seaco, one of the world’s largest lessors of containers used to transport goods, said one of the people with knowledge of the discussions.
That’s when Morgan Stanley, which had managed the proposed October debt sale, came in with a proposed bond issuance, the people said.
The combination of the two deals meant Bohai reduced its financing costs, since private credit investors typically look for double-digit returns. While the bonds were issued with an 8.75% coupon, a stock exchange filing dated Aug. 13 showed loans were provided to Global Aircraft leasing with an 11.25% interest rate.
The coupons on junk-rated dollar bonds issued by Chinese firms have ranged from 4.25% to 7.5% this year, according to data compiled by Bloomberg.
A failure to refinance the Global Aircraft bond coming due would have led to a rating downgrade for the Bohai unit, Moody’s Ratings said in April, leading to further difficulties in accessing capital. Instead, Bohai may have offered other distressed firms another model of refinancing.
“More borrowers will opt for a more significant role of private credit in its liability management as it is more flexible to negotiate terms with investors and get funding quicker despite a higher cost,” said Ng at Natixis.
–With assistance from Reshmi Basu, Yuling Yang and Paula Seligson.
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