Offshore loans for China Inc are encountering delays due to a longer regulatory approval process under a new rule that came into effect in February.
The National Development and Reform Commission introduced Order 56, effective from February 10, to increase oversight and tighten requirements for foreign borrowings by Chinese enterprises.
Order 56 replaces NDRC Circular 2044, a regulation introduced in 2015 that only oversaw filing and registration of offshore loans. The new regulatory regime requires approval and registration of foreign debt, which is expected to lead to greater oversight and longer timelines.
“This is the most important regulation of foreign debt in the PRC since NDRC Circular 2044,” said David Lam, partner at law firm King & Wood Mallesons. “It consolidates and refines the rules under Circular 2044, its subsequent guidance and Q&As, as well as expands the coverage of foreign debt regulation.”
Under the new rule, NDRC has lengthened its review and decision-making period for offshore loan applications to “within three months” from “within seven working days” previously. Some market participants believe the actual time taken for the entire process, including obtaining approvals, is only a bit longer than before as previous filings took weeks to complete in practice despite having a seven-day window.
“Under normal circumstances, the process can take up to one to two months, slightly longer than that under the previous NDRC Circular 2044,” said Francis Chen, partner at law firm Mayer Brown. “However, we note that borrowers have started the preparation work much earlier. In the past, they may have only started preparing for the filing after signing of the relevant documents. In comparison, nowadays they would have most of the documents in place at the time of signing.”
Timeline issues
As additional documents are required under the new rule, borrowers are encouraged to plan ahead for their foreign debt applications, especially for event-driven financings for which the closing of the loan is tied with the completion of the related purpose. The new rule now requires signed facility agreements, security documents, and legal opinions and authenticity undertakings from professional entities.
The process could take longer if the deal involves a “neibaowaidai” structure – an offshore borrowing with onshore security or guarantees. Such a borrowing will require registration with the State Administration for Foreign Exchange as per existing rules, which could stretch the timeline by another one to three months.
According to Mayer Brown’s Chen, the two processes may or may not go in parallel, depending on the practice of the local SAFE authorities in the municipality or province from which the borrower hails, and “in any event, SAFE will only complete its registration for a transaction after the relevant NDRC approval is obtained”.
From a deal structuring perspective, Lam from King & Wood Mallesons advises market participants to consider the interplay between Order 56 and other cross-border lending regulations, especially PBoC 27, a rule issued by the People’s Bank of China that allows onshore lenders to engage in offshore lending.
Taken together, Order 56 and PBoC 27 could allow borrowers to work with different lenders to take advantage of the nuances in the application of the rules.
According to Lam, offshore loans from onshore lenders do not constitute foreign debt under Order 56. As such, a borrower with urgent funding needs may tap an offshore borrowing from onshore lenders as the facility would not require a review from and registration with NDRC under Order 56.
However, PBoC 27 imposes quota and end-use restrictions. For example, proceeds of offshore loans cannot be repatriated to China or be used to refinance foreign debt with a “neibaowaidai” structure.
“The parties may form an offshore syndication comprising both onshore and offshore banks, and structure the loan into tranches based on the nature of the syndicate banks, the intended use of the loan proceeds and closing timeline requirements,” Lam said.
To factor for potential delays, new loans being transacted since the introduction of Order 56 carry longer availability periods of three months or more as borrowers must obtain a registration certificate for an offshore borrowing before the first drawdown can take place. In some cases, the clock on the availability period starts after the completion of the NDRC registration.
Wider consequences
As the market awaits more clarity in the implementation of the new rule, some borrowers are opting for loans with a one-year tenor, as these loans fall outside the purview of Order 56.
“Many of these borrowers came to us initially to raise three or five-year loans, but ended up doing one-year deals to wait out until there is more clarity on the actual implementation of the new rules,” said a Hong Kong-based loan banker. “When we sign these deals, we expect to replace them with three or five-year borrowings when they mature.”
State-owned Hunan Construction Engineering Group and solar module maker JinkoSolar Holding are both in the market with one-year offshore financings. In March, internet giant Sina closed a US$300m 364-day term loan that comes with a one-year extension option.
Order 56 has also introduced a new concept regarding indirect foreign debt, which covers the issuance of offshore bonds or loans by an offshore enterprise. According to Mayer Brown’s Chen, the definition of indirect foreign debt needs more clarity as it could apply to borrowings that have little to do with China.
“For example, even if none of the obligors is a Chinese entity; the proceeds of the facility are not to be remitted into China; and the purpose of the loan is not mainland-related, the borrowing may still be impacted by Order 56 if more than 50% of the assets of the borrower or the borrower group is in China,” said Chen.
He further pointed out that several borrowings for borrowers from Hong Kong, which have the majority of their assets in China, could be affected by Order 56. He noted that “if a formal consultation was made with the NDRC, the regulator may indeed confirm that no approval or registration is required in many such cases”.