Nomura Holdings and co-lenders spent nine months poring over the books, sizing up management and even checking out the factory floor at China's Ultrasonic AG before deciding in August to give the Frankfurt-listed shoemaker a $60 million unsecured credit facility.
The loan was unsecured in keeping with regulations in China at the time it was structured. Nomura, a Japanese bank, and its partner banks, however, felt they had done their homework.
But within weeks, the 3-year loan had been drawn down in full and two of Ultrasonic's top executives had disappeared - leaving the lenders in a situation that should ring alarm bells for foreign bankers exposed to China.
"You couldn't get onshore security for offshore loans," said a person involved in the loan negotiations. "It was a common risk in offshore borrowing for Chinese companies."
The affair is a reminder for offshore banks of the risk of lending to small and mid-sized Chinese firms which have long struggled to access credit. Local banks are more inclined to lend to larger, more established companies as economic growth slows, forcing smaller firms to seek expensive loans in the less-regulated shadow banking industry or from offshore lenders.
Asia-Pacific banks had about $1.2 trillion worth of China-related exposure at the end of last year, including bank and non-bank lending, latest Fitch Ratings data show.
"These mid-sized companies are getting hit the hardest by the slight slowdown in the economy, and that's having an impact on how they view the future ...," said Kent Kedl, Shanghai-based managing director for Greater China and North Asia at consultancy Control Risks.
"This isn't to say that mid-sized companies have any more innately corrupt people in them than do large companies, but large companies can weather storms a little easier."