by Günther Hamm
China has moved into LatAm in a big way, with over $15 billion invested there in the past years. But that amount would be much greater if Chinese companies investing in the region could gain better access to low-cost government financing.
Chinese companies are interested in purchasing equity stakes, taking on build-operate-and-transfer (BOT) projects and building long-term investments but they need funding to carry these ambitions forward.
Chinese buyers involved in other regions outside of LatAm typically have access to cheap financing, provided by governmental banks like the Export Import Bank of China (Eximbank) and China Development Bank (CDB). But that form of loan generally requires a sovereign guarantee, which many LatAm countries are reluctant, or even forbidden, to provide.
China Eximbank and CDB are the most important lending organizations for Chinese companies going abroad. But state-owned enterprises say that China Export & Credit Insurance Corporation (Sinosure) is the key gatekeeper in getting a loan. For projects without a sovereign guarantee, government banks will generally provide funds only if Sinosure insures the loan.
Sinosure, which was formerly part of China Eximbank, has its own demands for insuring loans. Sinosure will look for either a sub-sovereign guarantee or a deal with a reputable bank operating in LatAm that can on-lend the funds.
For deals in which either Sinosure or China Eximbank is involved, at least 70% of the content used in the project must come from China or the borrower will need to take on greater risk. Additionally, Sinosure currently looks to only insure projects up to seven years, so longer term projects may need to be arranged directly with government banks.
Among the most notable examples of this structure is China Railway International’s 2010 arrangement to build a new subway line in Buenos Aires. The project is estimated to cost $1.5 billion, with the vast majority of the funds coming from China Eximbank. The terms are particularly favorable: a five-year grace period, ten years amortization and a rate of less than 4%.
The project was made possible when Sinosure agreed to recognize the city’s credit without a sovereign guarantee. The Buenos Aires project allows China to strategically open a new market in a region that is heavily urbanized.
Further sub-sovereign guaranteed loans seem likely. For instance, this structure is also commonly used by intra-regional development banks like Brazil’s BNDES, which has its own insurance company that seeks guarantees for projects.
A successful transaction will need to offer benefits to all sides. Sub-sovereign guarantees will only be forthcoming for projects that local governments view as strategic. The Buenos Aires subway project was supported strongly by the city’s mayor who visited China as part of the process.
For more commercial projects, local banks that have a better understanding of the project’s risk profile can be engaged. These banks could profit by borrowing capital cheaply from Chinese governmental banks and on-lending to the Chinese company participating in the project. Hence there is a possibility for Latin American banks to create a large intermediary role.
Still, it is questionable whether LatAm banks are willing to take on such risks. Peter Vonk, vice-president of corporate finance and investment banking at regional development bank Corporación Andina De Fomento (CAF), remains unconvinced.
“It doesn’t sound like a very feasible situation to me, except for state-owned development banks. For commercial banks or even for CAF, we would prefer to see a risk sharing element involved. Otherwise it’s just a funding exercise as far as we are concerned,” he says.
Most of China’s participation in LatAm continues to be in the form of barter agreements, whereby the Chinese offer money or facilities in exchange for either commodities or a guaranteed offtake.
But given the number of Chinese companies looking to expand into LatAm, there is a large potential opportunity for any advisor who can develop a winning and replicable formula to securing Chinese government loans. Loan approval is principally at the discretion of Sinosure and China Eximbank, so developing a strong relationship with them and understanding their evolving criteria is key. LF