Wall Street banks are taking their unicorn playbooks to China.
After arranging billions of dollars in loans for highly valued - and money-losing - US startups like Uber Technologies Inc., banks including Morgan Stanley and Goldman Sachs Group Inc. are angling to do the same for some of China's biggest unicorns. They helped Bytedance, owner of the wildly popular TikTok video app, borrow US$1.3 billion in April and are said to be raising as much as US$1.4 billion for two other Chinese tech startups - borrowers that until recently had rarely tapped the syndicated loan market.
Banks are betting the loans will lead to more lucrative mandates like initial public offerings, just as they did in the US with mega-listings by Uber and several of its peers. But that's no guarantee as China's trade war with America spreads to the technology industry, heightening investor concerns over frothy valuations.
While banks earned an average margin of 145 basis points over benchmark rates on five-year syndicated loans for Chinese borrowers this year, the juiciest fees come from follow-on services like equity issuance. Underwriters have charged 5 to 6 per cent of the float value for US debut share offerings in recent years and between 2 and 3 per cent in Hong Kong, though fees are sometimes lower for larger offerings, according to data compiled by Bloomberg.
"The returns on these loans are usually acceptable, given that leverage tends to be low and given the expected future cross-sell opportunities, including future capital markets and trade financing," said Benjamin Ng, head of Asia Pacific debt syndicate and acquisition finance at Citigroup in Hong Kong.