Can Yancoal raise finances outside China?

Yancoal continues to be dogged by questions about its ability to fund the acquisition of Rio Tinto’s Hunter Coal & Allied assets, despite being confirmed as Rio’s preferred bidder on Tuesday.

Yancoal has previously been criticised for not being able to show how it would fund the planned mega-deal. This comes after it was revealed that Noble Group, Yancoal’s second biggest shareholder, would be unlikely to participate in fundraising due to their stressed financials.

Yancoal’s parent company, Chinese state-owned Yanzhou Coal is also saddled with a weak balance sheet, and was issued a BB minus credit rating by Standard & Poors in May. The ratings agency considers this to be “non-investment grade speculative.”

Concerns over the stability of Yancoal’s position in the purchase have heightened, following the announcement of a higher bid to fend off a competing offer from Swiss mining giant Glencore.

To outmatch the rival bid, Yancoal has been forced to offer Rio an extra US$500 million in accelerated payments, as well as a number of regulatory assurances.

Yancoal’s increased offer, which has also seen the termination fee raised to $100 million should the deal collapse, has raised the spectre of a previous unsuccessful attempt to raise equity outside the Chinese market. In 2014, the miner attempted to raise $2.3 billion by issuing Subordinated Convertible Notes (SCN). It was blocked by the Takeover Panel due to “unacceptable circumstances.”

Past failures could heighten investor fears over a triggering of the deal’s termination clause. If the deal were to collapse, Rio Tinto’s board would be left back at square one, after years of negotiations to sell these assets.

The deal is due to receive final confirmation at two upcoming Rio Tinto shareholder meetings on June 27 and 29.