Like many Chinese companies, consumer electronics and home appliances manufacturer Haier Group has been on an international M&A spree.
Perhaps the most striking deal was its acquisition of General Electric’s home appliance unit, GE Appliances, last year. In what was dubbed a “symbolic” purchase, the company from China's beer-production capital, Qingdao, agreed to pay $5.4 billion when it announced the deal in January 2016. The closing price ended up at $5.58 billion in June because of “increased working capital in the business”, according to GE.
The deal brought together the second-biggest players in home appliances in the world's first and second-biggest economies and was considered a major coup for Haier, especially given that its rival Midea Group, the country's biggest home appliance chain, was also reportedly interested.
But one key challenge it faced - which may also prove highly relevant for other Chinese corporates looking to buy prize assets abroad - was finding the dollar liquidity needed to complete the transaction, against a tight timescale. It's one of many lessons China's acquisitive corporations will need to learn as they become big buyers of international asset.
In the spotlight was Haier Finance Co., the in-house bank that manages treasury activities for the group. It was left with less than 180 days to source the dollar liquidity needed for the transaction.
Dollar mandate
And that was one of the key missions for Zhang Bing, head of trading at Haier Finance, when he joined the firm in late April.
“I needed to help the company purchase dollars to close the deal,” Zhang told FinanceAsia's sister title Corporate Treasurer. Zhang previously ran a hedge fund in Hong Kong for five years and before that, worked on the prop trading desk at Citi.
China Development Bank provided a $3.3 billion loan, according to Haier's public filing in June – accounting for around 60% of the deal value. But for the rest, “we had to buy from the marketplace”, Zhang said.
Lucky for Haier, the State Administration of Foreign Exchange, China’s FX market watchdog, gave it the go-ahead to purchase most dollars offshore, where liquidity conditions are better than onshore. In the end, Haier bought around 20% of the dollars needed onshore and 80% offshore.
Hard negotiation
But the challenge was not only about sourcing the liquidity with a tight deadline; there was also the problem of, as Zhang puts it, “getting things done at the right cost”.
In order to minimise the average purchase price for dollars, Zhang’s team engaged in different structures involving contracts such as options, forwards and first-generation exotics.
But for this particular dollar-sourcing mission, “apparently every bank knew our direction,” said Zhang, adding: “Even though you asked for two-way markets, banks tended to quote the higher end of the buy [dollar] direction.”
Onshore, Haier Finance is a direct participant in the CFETS trading platform, China’s official interbank trading market ,where members can find top-tier spreads up to 50% better than those banks provide to clients. Zhang could therefore enter positions in a simple “click and trade” fashion. In the offshore markets, however, Haier had to negotiate hard with dealers.
Given the large total needed, Zhang had to dilute the search for liquidity across many trading days. On an intraday basis, “we further divided our daily volume into small pieces,” Zhang said, adding that the team had to negotiate hard with the dealer on almost every transaction, as “even one pip could have made a difference".
“It’s actually a lot of fun…but over time it’s getting tedious, you spend too much time on the phone, and it’s not something you can do on 250 business days every year,” Zhang recalled.
FXGO adoption
To improve efficiency in dealing with FX transactions, Haier Finance adopted FXGO, an electronic FX trading platform by Bloomberg, towards the end of last year.
“The good thing about FXGO is that it consolidates all the liquidity available so we don't need to log on to, say, 10 different systems every day,” Zhang said.
The tool allows users to access real-time executable pricings from multiple liquidity providers, and click and trade various FX instruments at the best price quoted. The post-trade reporting generated on FXGO also gives users fewer compliance and reporting hassles.
Flip side
One problem common to many electronic trading platforms is that when the notional value of a trade exceeds a certain number, streaming prices start to get very bad.
“I guess people are still not 100% comfortable with machines. When it comes to a big transaction, banks still prefer to have human beings to process the order,” Zhang said.
Although the pitfall is not unique to FXGO, Zhang said: “Ideally, we'd like to have streaming prices with decent notional sizes, so that we can just click and trade.”
Currently, Zhang’s team still do large ticket transaction verbally, while using FXGO mainly for trades with a notional size below $10 million, be it a forward or spot contract.
Next steps
A few things are now set on Zhang’s agenda.
One is to get more dealers on board with FXGO. According to Zhang, Haier Finance now has credit lines from more than 10 dealers. “I believe I sent a request to all of them to put them on FXGO, but only very few answered and acted,” Zhang said.
He linked their reluctance to the fact almost every bank – unlike small and medium sized dealers and brokers – has its own “single-bank trading platform”. And banks would in theory prefer a corporate client to go through their platform rather than a third-party system.
And even among bank dealers that are on the FXGO, Zhang noticed they tend to provide wider bid-offer spreads on FXGO than they quote on their own trading platforms, essentially charging more to counterparties that trade with them on FXGO.
“Ideally, we want to see them provide the same spread,” Zhang said.
