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Thursday, 22 January 2009
New era beckons for M&A lending
Domestic and foreign banks in China are welcoming a change in regulations that will create a new market for merger and acquisition lending to mainland companies and their offshore special-purpose vehicles.
Domestic and foreign banks in China are welcoming a change in regulations that will create a new market for merger and acquisition lending to mainland companies and their offshore special-purpose vehicles.
In early December, the China Banking Regulatory Commission announced a relaxation on the prohibition of loans for equity acquisitions, as part of a raft of measures to stimulate economic growth.
In place since 1996, the original restrictions (subject to very limited exceptions) prevented the use of loans for acquiring equity interests in companies, aiming to prevent potentially risky investments such as securities trading.
However, acquisition loans are popular financing tools for mergers and acquisitions across the globe and December’s changes bring China’s lending market into line with its international counterparts and provide a new source of funding for industrial reorganisation and consolidation at a critical time for the country’s economy.
Given this desire to stimulate economic growth, the new regulations favour outbound acquisitions by companies in China and restructuring and mergers within domestic industries.
The December announcement and the opinions that followed reveal that loans to “overseas enterprises” will be restricted to offshore special vehicles established by domestic companies for merger and acquisition activities, rather than foreign companies.
And speculators, please note: the original restriction is still in place, and it continues to prohibit loan proceeds from being used for equity investments that fall short of the merger and acquisition activities contemplated by the December announcement.
Not surprisingly, the Chinese government is anxious to avoid creating more problems than it solves through stimulating a rash of over-zealous lending in the current economic climate.
To tackle this, the new regulations include stringent guidelines for potential lenders and loan customers. The CBRC has specified lending and leverage ratios, the types of risk management systems and measures required.
Commercial banks wanting to enter the merger and acquisition loan business will need a capital adequacy ratio no lower than 10 per cent. According to the latest publicly available figures, the majority of listed Chinese banks satisfy these capital adequacy requirements. In addition, the 20 or so foreign-invested banks that have completed their local incorporation in China will be able to offer merger and acquisition loans in the country if the minimum capital adequacy ratio and other relevant criteria are met. Branches of foreign banks will not be allowed to offer these loans.
Once qualified, the lenders will not need to secure regulatory approval for each individual application before making a merger and acquisition loan. Instead, the lender will be expected to develop business procedures and internal controls, appropriate to this type of loan.
David Lam is a senior associate of Clifford Chance in Hong Kong and Zhang Nan is an associate in Beijing
1 comment:
New era beckons for M&A lending
David Lam and Zhang Nan
19 January 2009
Domestic and foreign banks in China are welcoming a change in regulations that will create a new market for merger and acquisition lending to mainland companies and their offshore special-purpose vehicles.
In early December, the China Banking Regulatory Commission announced a relaxation on the prohibition of loans for equity acquisitions, as part of a raft of measures to stimulate economic growth.
In place since 1996, the original restrictions (subject to very limited exceptions) prevented the use of loans for acquiring equity interests in companies, aiming to prevent potentially risky investments such as securities trading.
However, acquisition loans are popular financing tools for mergers and acquisitions across the globe and December’s changes bring China’s lending market into line with its international counterparts and provide a new source of funding for industrial reorganisation and consolidation at a critical time for the country’s economy.
Given this desire to stimulate economic growth, the new regulations favour outbound acquisitions by companies in China and restructuring and mergers within domestic industries.
The December announcement and the opinions that followed reveal that loans to “overseas enterprises” will be restricted to offshore special vehicles established by domestic companies for merger and acquisition activities, rather than foreign companies.
And speculators, please note: the original restriction is still in place, and it continues to prohibit loan proceeds from being used for equity investments that fall short of the merger and acquisition activities contemplated by the December announcement.
Not surprisingly, the Chinese government is anxious to avoid creating more problems than it solves through stimulating a rash of over-zealous lending in the current economic climate.
To tackle this, the new regulations include stringent guidelines for potential lenders and loan customers. The CBRC has specified lending and leverage ratios, the types of risk management systems and measures required.
Commercial banks wanting to enter the merger and acquisition loan business will need a capital adequacy ratio no lower than 10 per cent. According to the latest publicly available figures, the majority of listed Chinese banks satisfy these capital adequacy requirements. In addition, the 20 or so foreign-invested banks that have completed their local incorporation in China will be able to offer merger and acquisition loans in the country if the minimum capital adequacy ratio and other relevant criteria are met. Branches of foreign banks will not be allowed to offer these loans.
Once qualified, the lenders will not need to secure regulatory approval for each individual application before making a merger and acquisition loan. Instead, the lender will be expected to develop business procedures and internal controls, appropriate to this type of loan.
David Lam is a senior associate of Clifford Chance in Hong Kong and Zhang Nan is an associate in Beijing
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