Chinese Government considers rules on “irrational” debt-laden deals

The acquisition of Rio Tinto’s Coal & Allied assets by state-owned Chinese firm Yancoal has fallen under much scrutiny over the past few months – and now concerns have been raised about whether the Chinese government will allow the deal to go ahead.

Chinese officials are currently reviewing how to regulate deals made by domestic corporations to acquire assets overseas and if said deals should be blocked if they are found to be “irrational”.

And so, Beijing-based economics and finance magazine Caijing asks the question: “Are coal companies assuming potentially unstable risks by continuing to acquire overseas assets using highly leveraged financing?”

Yancoal’s net debt currently sits at $5 billion with the acquisition of Coal & Allied this will increase pro-forma to $6 billion. If Mitsubishi exercises their right to dispose of their 32.4% stake in the Hunter Valley assets to Yancoal, the Chinese firm will be forced to borrow a further $1bn.

Currently, Yancoal’s net debt to EBITDA ratio stands at 26 which, considering an investment grade rating requires a ratio of less than three, does not instill massive amounts of confidence in the stability of the firm in the context of this deal.

However, whether or not the calls for the Chinese government to direct their attention to these irrational details will be answered remains to be seen.