The following article appeared on Debtwire on May 6, 2015

Bank of America Merrill Lynch has been bumped off a major-buyout-financing by Bank of China and China Merchants Bank, which swooped in to back the buyout of US-listed OmniVision Technologies with a term loan at the last minute, in the latest instance of what is being dubbed “patriotic lending” by Western bankers in Asia, according to three sources close to the situation.

The USD 1.9bn going private deal for OmniVision, announced on April 30, was backed by a financing package of around USD 800m from the two Chinese banks, split between a term loan of above USD 500m and a bridge loan facility, one of the sources said.

Bank of America Merrill Lynch is the M&A advisor for the consortium buying OmniVision, which makes camera image sensors, and was arranging banks to back the buyout before the late-stage deal saw BOC come in as mandated lead arranger and sole bookrunner, and China Merchants as lead arranger, the same source said.

A consortium of Beijing-based Hua Capital Management, CITIC Capital and Goldstone Investment, a subsidiary of CITIC Securities, struck the deal to buy OmniVision for USD 1.9bn. The decision to use capital from BOC and China Merchants was straightforward, said a source in the sponsor consortium.

“It was based on pricing and commitment. BOC made a hard commitment and will syndicate later. The foreign banks need time to build a syndicate first. Not much of a decision,” the source said.

BAML is a balance sheet bank, meaning it would price and hold a portion of a loan based on its perception of the risk involved. But it would not hold the bulk of a deal to buy OmniVision, and would syndicate its risk out to other banks, pricing the cost of a selldown into the deal, said the first source.

“If BOC and China Merchants are not going to sell a large chunk of the deal into the market, just a small portion to like-minded banks, they can ignore the 2.25 or 2.5 points paid to participants that would add to overall costs in pricing a deal,” said the first source.

The OmniVision deal follows the buyout of US listed online games developer, Perfect World, which was backed by a USD 900m loan from  China Merchants Bank and Wing Lung Bank.

Large buyouts of US listed Chinese firms like Focus Media, taken private for USD 3.7bn in 2013, have featured Chinese banks as lenders, but not previously in such substantial roles.

Chinese banks take a different view of the risk of holding a large portion of a buyout loan for a firm like OmniVision, said a senior Chinese banker, noting that their offshore USD funding costs are not cheap, at around 3% to 4%.

“They will be more familiar with the credit, and the onshore risks with these companies, and they take a different view of the long-term relationship they will build with the company,” said the source.

“USD 1bn-USD 2bn is small for these banks, when you consider they are used to lending USD 10bn to an SOE. Their cost of funding in USD is not cheap, but if they see an opportunity, they will match or undercut a Western rival,” the source added.
Relationships with the Chinese private equity firms involved in the buyout, which include blue chip name CITIC Capital, would also factor into Chinese banks’ behaviour, the source said.

Beijing based Hua Capital’s president, Steven Zhang, is a former partner at WestSummit Capital, a China-based private equity firm specializing in overseas buyouts, which is backed by sovereign wealth fund China Investment Corporation (CIC), according to S&P CapitalIQ data.

CITIC Capital, a buyouts unit owned by owned by giant Chinese conglomerate CITIC Group, Tencent Holdings, CIC, and Qatar Holding LLC, has around USD 4.6bn in capital under management, and a long history of buying companies overseas, including Asia-Info Linkage. Goldstone Investment is a subsidiary of CITIC Securities, and an established direct equity investor in China.

While BAML and other Western banks are tallying losses from the Perfect World and OmniVision deals, foreign sponsors are not yet tapping Chinese banks as lead underwriters on buyouts.

“We haven’t seen international sponsors going with Chinese banks yet. Part of it is, they’ve done business with Western banks before, and know what to expect if they run into problems, and maybe need a covenants waiver down the line. With Chinese banks, we don’t know how that would play out,” said the third source.

by Stephen Aldred