ZTE Corp. (763) plans to use its biggest funding yet from China Development Bank to become one of the world’s top-three suppliers of wireless network equipment in the next two years, surpassing France’s Alcatel-Lucent SA. (ALU)
The $20 billion facility that the telecommunications equipment maker received this week is more than double the financing that kicked off the company’s “strategic cooperation” with CDB in 2005. The policy lender, which has provided funds at cheaper rates than commercial banks, didn’t announce the cost structure. The yield on ZTE’s 2015 bond has risen 66 basis points to 4.86 percent since being sold in June. The average yield on U.S. telecommunications debt is 3.02 percent, according to Bank of America Merrill Lynch indexes.
ZTE’s sales have quadrupled since its first facility, helping make it the fifth-largest vendor of wireless equipment by revenue in the first half of this year. The credit facilitates the manufacturer’s emerging-market expansion by financing customers’ equipment purchases. The U.S. government questioned ZTE’s loans from state-owned CDB and possible security threats when seeking to block sales of its network gear in October.
“Aggressive financing is a key part of ZTE’s strategy to take market share,” said Tucker Grinnan, Hong Kong-based analyst at HSBC Holdings Plc. “In markets like India and Africa where local borrowing costs are high, it’s a big advantage to be able to offer long-term financing.”
The CDB line will help finance sales of equipment and related services abroad, according to a Dec. 4 company statement. The support comes after ZTE’s performance hit a bump in the third quarter, with a net loss of 1.95 billion yuan ($313 million) compared with a profit of 299.3 million yuan a year earlier, due to delays in closing overseas deals.
The international obstacles have further complicated ZTE’s expansionary goals. Members of the U.S. House of Representatives Intelligence Committee asked Chairman Hou Weigui how the company was able to secure the $15 billion credit line from CDB in 2009, an amount that exceeded its annual revenue. The European Union began looking into credit facilities for ZTE and Huawei Technologies Co. earlier this year.
The average rate on outstanding loans and advances extended by CDB was 5.62 percent, according to its 2011 annual report. That compares with the average 5.92 percent interest that the People’s Bank of China charged on one-year loans over the past decade.
China’s biggest policy lender “fully complies with international business practices and marketizes its operations in terms of loan terms and conditions,” Jiang Tao, company spokeswoman, wrote in an e-mailed response to questions yesterday. “CDB determines the lending rate of project loans mainly depending on the value of commercial loans to the overseas borrowers and the limit of raised capital of the bank.”
Two calls to CDB seeking comment on its funding weren’t answered.
The yield on ZTE’s 0.8 percent bonds due January 2013 has jumped 62 basis points this half to 4.31 percent as of Dec. 6, according to exchange-traded pricing compiled by Bloomberg. The yield on the government’s benchmark 10-year notes increased 24 basis points in the same period to 3.57 percent as of Dec. 5. The premium on CDB’s April 2022 notes over similar-maturity government securities was at 86 basis points as of Dec. 6, down from a high of 88 in October.
ZTE’s sales rose to 86.3 billion yuan last year, from 21.6 billion yuan in 2005 when CDB extended the first credit line of $8 billion. With the latest financing, ZTE has a “comprehensive strategy to address markets globally,” Chairman Housaid in the Dec. 4 company statement.
“ZTE will leverage the CDB’s financial support and grasp the opportunities in the markets,” Hou said in the e-mailed statement. “We aim to achieve a global top-three position before 2015.”
CDB’s support for Chinese companies is a pillar of the country’s “going out” policy, which aims to create global leaders in telecommunications, alternative energy and oil as export-driven growth slows. Gross domestic product expanded 7.4 percent last quarter, the weakest in more than three years.
“Our support for Huawei, ZTE and other high-technology companies has opened up the overseas market,” CDB Chairman Chen Yuan wrote in China Reform magazine last year.
The yuan fell 0.05 percent to close at 6.2282 per dollar in Shanghai yesterday, according to the China Foreign Exchange Trade System. The currency has climbed 19 percent over the past five years.
The cost of insuring China’s sovereign bonds with five-year credit-default swaps fell to the lowest since 2010 at 56.2 basis points on Nov. 30, according to data provider CMA. The company is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if an issuer fails to adhere to its debt agreements.
In the first half of this year, ZTE’s sales of network equipment ranked behind Huawei, Ericsson AB (ERICB), Alcatel and Nokia Siemens Networks, according to Geng Yang, a Hong Kong-based analyst with BOCI Research Ltd.
Alcatel-Lucent spokesman Simon Poulter declined to comment on Hou’s remarks. The Paris-based company, which is restructuring to end a six-year streak of mounting losses, is pursuing financing of at least 1 billion euros ($1.3 billion) from banks led by Goldman Sachs Group Inc. and Credit Suisse Group AG, people familiar with the talks told Bloomberg.
Nokia Siemens has “strong momentum” after gaining share in the “flat-to-declining” global wireless network equipment market in the third quarter, spokesman Ben Roome said, without supplying details.
“Two of the current top five vendors, Nokia Siemens and Alcatel-Lucent, are in the process of downsizing to raise cash and better focus their efforts,” said Matt Walker, an analyst at telecommunications consultant Ovum. “This will almost certainly lower their share, making ZTE’s goal more attainable.”
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