Banks are hoping that the loans will translate to more profitable mandates like initial public offerings, but the U.S. trade war with China may provide hurdles.

Wall Street banks are lending billions to China's unicorns, just as they did for big tech companies in the U.S. After lending to highly-valued technology firms such as Uber and similar peers, banks including Morgan Stanley and Goldman Sachs are arranging loans for China’s biggest unicorns, «Bloomberg» reported (behind paywall). 

«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, who was quoted in Bloomberg.  

Juicy Fees

Banks make an average margin of 145 basis points over benchmark rates on five-year syndicated loans for Chinese borrowers this year.  Their juiciest fees, however, come from follow-on services like equity issuance where underwriters have charged 5 to 6 percent of the float value for U.S. initial share offerings and between 2 to 3 percent in Hong Kong. Fees could be lower for larger offerings.

Morgan Stanley, the lead sponsor of Uber’s IPO in May, earned $41 million from that deal. The U.S. bank had helped arrange a $1.1 billion loan for the ride-hailing company about one year ago. Similarly, Goldman has supplied Dropbox a $600 million credit facility in 2017, Bloomberg reported, quoting people familiar with the matter. It occurred also about a year before the cloud storage company went public with Goldman as its lead underwriters for its IPO.

Attractive To The Unicorns

Loans appeal to Chinese unicorns because they can be arranged quickly with few public disclosures. This is particularly alluring to young companies that want to avoid giving away too much information to competitors, said Andrew Ashman, the head of loan-syndication for Asia-Pacific at Barclays. 

Moreover, historically low borrowing costs adds the cherry to the pie. Bytedance was offered an interest margin of 280 basis points over Libor for its loan in April while Beike asked banks for an interest margin of 210 basis points. 

Cloudy Path To Paydays

The escalating trade conflict, which has expanded beyond tariffs in recent months to encompass parts of the tech industry, could delay the paydays from unicorns, analysts note. Another is frothy valuations of tech companies, which damp investor appetite.

So far, Wall Street banks have helped Bytedance, owner of the popular TikTok video app, borrow $1.3 billion in April and are said to be raising as much as $1.4 billion for two other Chinese tech startups.