Asia > Eastern Asia > China > Life after Rosneft deal: CEFC ambitions face debt, regulatory hurdles

China: Life after Rosneft deal: CEFC ambitions face debt, regulatory hurdles

2017/09/17

CEFC China Energy is considering additional deals next recently snapping up a $9.1 billion stake in Russia's Rosneft, industry sources said, shrugging off a growing deficit pile and rising regulatory scrutiny.

Privately owned CEFC, in just a few years, has gone from a niche oil trader to a $25 billion conglomerate with strong political ties and a rare arrangement to store part of the country's strategic oil reserve.

Its ambit presently extends beyond oil assets to infrastructure and even financial services. It is one of a handful of conglomerates in China with all financial services licenses, owning or controlling banks, an insurer, a brokerage firm, a trading platform and several funds, according to its website.

CEFC has long held overseas increase ambitions and grabbed the spotlight at the same time as it became the initial to clinch a major transaction since China's recent crackdown on over-heated acquisitions.

Last week, days next Russian President Vladimir Putin visited Beijing, CEFC agreed to buy a 14.2 % stake in Rosneft, Russia's major oil producer, from commodities giant Glencore and the Qatar Investment Authority.

But CEFC, whose ultimate owners are individuals, according to public corporate registry filings, has a broader plan. Industry executives and analysts describe the 15-year-old group as wanting to be the new Sinopec, Asia's major oil refiner, or China's own Glencore. That would mean additional deals are inevitable.

CEFC is considering investing in En+ as part of the aluminium-to-power conglomerate's planned IPO, Reuters reported before this week.

And the group had expressed interest in investing in Portugal during a recent visit, with energy and insurance assets likely targets, according to industry sources.

CEFC has tapped China Development Bank and Russian lender VTB to help fund the Rosneft transaction, one banking source said. CDB, a Chinese policy bank, has long supported CEFC and is its biggest lender, according to the company's financial reports.

A senior CEFC executive said it is in discussions with CDB on financing the stake buy but added it was too early to give details. CEFC has 30 billion yuan trade financing credit line with CDB, he said.

"CEFC will use our own cash flow and borrowings from Chinese and foreign institutions to finance the Rosneft transaction," the company said in a statement to Reuters.

CDB and VTB did not respond to Reuters requests for comment.

WATCHFUL EYE
But CEFC's ambition is not without risks. It has billions of dollars in deficit coming due in the months ahead. And the Rosneft transaction - CEFC's most high-profile to date - will aggravate its deficit burden.

The company has around 44 billion yuan ($6.7 billion) of short term borrowing due by the initial half of 2018, according to its 2017 half-year financial statement, as disclosed to onshore bondholders. Its total deficit amounted to 117 billion yuan at end-June, compared to total assets of 169 billion yuan. It reported a 2016 net profit of 4.5 billion yuan.

Roughly 60-70 % of the Rosneft transaction price is being funded through deficit, according to one banking source with direct knowledge of the transaction.

In a July ratings statement on CEFC's deficit issuing entity Shanghai CEFC International Group, China Lianhe Credit Rating cautioned there were uncertainties in the company's overseas investments and businesses due to fluctuating oil prices, and that its rapidly growing short-term deficit and increasing deficit burden could have negative impact on the company's operations and development. It did not change its AAA long-term credit ratings on the entity.

"The company conducts relevant investments based on our long-term increase strategy, healthy financial status and thorough risk assessment," CEFC said.

CEFC will as well need to address regulatory concerns, not least over how its Rosneft acquisition circumnavigates U.S sanctions.

The United States has imposed a new round of economic sanctions on Russia and its national-owned firms inclunding Rosneft. Lender VTB is as well on the inventory.

According to one person with direct knowledge, China's National Development and Reform Commission (NDRC) wrote to CEFC prior to the transaction's announcement, questioning how the sanctions will affect the transaction and the Chinese firm's next business. NDRC did not instantly comment on the situation.

CEFC said the company is dealing with a globally respected party and had obtained the necessary guarantees and safeguards as part of the stake purchase agreement. "The company has understood there is no regulation whatsoever that prohibits acquiring these stakes from Rosneft," it said and declined to comment further.

Some of CEFC's before deals are taking a long time to complete amid regulatory scrutiny overseas.

A 50 % stake purchase in J&T Finance Group, which includes banks in the Czech Republic and Slovakia, is still pending approval in several Eastern European nations. CEFC as well hasn't obtained regulatory clearance to buy 51 % of KMG International, a fully-owned unit of Kazakh national oil and gas firm KazMunayGaz.

Sources at Chinese national-owned and commercial banks as well cautioned they may not be able to provide financing for the Rosneft transaction.

"We are still deciding whether to join the loan, given the timing right presently is very sensitive - following the new US sanctions," said one China-based loan banker. (Reporting by Kane Wu; Additional reporting by Julie Zhu, Aizhu Chen; and Carol Zhong and Yan Jiang of Basis Point; Editing by Muralikumar Anantharaman)

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