IFLR Asia Capital Markets Forum Internationalization of the RMB Market: how you can benefit from s financial opening Jay Lee Partner, Hong Kong What we will cover today 1. RMB internationalization 2. Structural changes on RMB bonds to be aware of 3. Case studies: Beijing Automotive v. Greenland Holding 4. Outlooks for keepwell deeds, SBLCs and guarantee 5. Recent PRC regulations that you need to know Yongmei Cai Partner, Beijing 4 December 2014 2 / L_LIVE_APAC1:3836247v3 RMB Global Growth RMB Internationalization Usage of RMB across the globe: Second most-used currency in global trade finance in Dec 2013 Seventh-most used payment currency, with more than RMB 4 trillion (HK$4.9 trillion) in trade settlements in 2013 123.6% growth in RMB payment in UK from July 2013 to July 2014 Shanghai-Hong Kong Stock Connect, a two-way cross-market stock investment trading program, will allow investors to trade eligible shares on each other s markets by using RMB has currency swap agreements with 25 central banks with the total amount of over RMB 2.7 trillion. 3 / L_LIVE_APAC1:3836247v3 4 / L_LIVE_APAC1:3836247v3
RMB - More RMB Hubs RMB - Hong Kong and London RMB Clearing Banks 10 official offshore RMB clearing centres Hong Kong, Macau, Taiwan, Singapore, UK, Germany, Korea, France, Luxembourg and Canada More RMB hubs London, Germany, Luxembourg, South Korea and Canada joined in 2014 Australia, Malaysia, United Arab Emirates, Kenya, Switzerland and USA are eager to join RMB hubs Hong Kong s RMB portfolio (as at the end of 2013) RMB 1,053 billion worth of deposits and certificates of deposit in HK 216 banks participating in RMB clearing platform in HK, of which 191 are branches and subsidiaries of foreign banks and overseas presence of banks in Total value of RMB bonds issued in HK reached RMB 410 billion since 2007 London s RMB portfolio In 2013, RMB denominated trade financing in London grew by 10% compared to 2012 and totally RMB 43 billion. RMB forex trading reached US$25.3 billion per day, up by 50% compared with 2012 5 / L_LIVE_APAC1:3836247v3 6 / L_LIVE_APAC1:3836247v3 RMB Bonds - Old Credit Enhanced Structures Structural Changes on RMB Bonds Old Credit Enhanced Structures Keepwell & Equity Purchase - Gemdale International Holding Limited (Issue Date: 26 July 2012) Bank Guarantee Structure - Hai Chao Trading Co., Limited (Issue Date: 4 August 2011) 7 / L_LIVE_APAC1:3836247v3 8 / L_LIVE_APAC1:3836247v3
Keepwell & Equity Purchase Undertaking - Gemdale International Holding Limited CNY1.2bn 9.15% Guaranteed Bonds due 2015 Issuer Gemdale International Holding Limited (a wholly-owned subsidiary of Gemdale Corporation) Six wholly-owned subsidiaries of Gemdale Corporation Issue Date 26 July 2012 Tenor 3 years Listing Singapore Stock Exchange Ratings Company rating: Ba1 Bond rating: Ba3 Gemdale International Holding Limited CNY1.2bn 9.15% Guaranteed Bonds due 2015 Issue Amount CNY1.2bn in aggregate Coupon 9.15% per annum, payable semi-annually in arrear Use of proceeds To finance general corporate and working capital Distinctive features It utilized a keepwell agreement, a deed of equity interest purchase undertaking and an interest reserve account to create a more innovative structure The highest yield in the Hong Kong Dim Sum bond market as of July 2012 9 / L_LIVE_APAC1:3836247v3 10 / L_LIVE_APAC1:3836247v3 Bank Guarantee Structure - Hai Chao Trading Co. CNY 900m 2.00% Guaranteed Bonds Due 2014 Hai Chao Trading Co., Limited CNY 900m 2.00% Guaranteed Bonds Due 2014 Issuer Hai Chao Trading Co., Limited Parent Hangzhou Zhongce Rubber Co., Ltd. The Export-Import Bank of Issue Date 4 August 2011 Listing None Tenor 3 years Issue Price 100% Issue Amount CNY900m Coupon 2% per annum, payable semi-annually in arrears Use of proceeds To be used for working capital and for general corporate purposes Distinctive features A deal featuring a guarantee from Export-Import Bank of It utilized a keepwell arrangement with the parent The credit enhancement supported by an onshore bank s guarantee was a first for the Dim Sum bond market in Hong Kong 11 / L_LIVE_APAC1:3836247v3 12 / L_LIVE_APAC1:3836247v3
RMB Bonds - Recent Credit Enhanced Structures Recent Structures Evolution from Gemdale 2012 RMB Bond Internal Enhancement - Strengthening Keepwell Deed and Liquidity Support from a Mothership Company Interest Reserve Account Agreement Equity Interest Purchase Undertaking (EIPU) Standby facility External Enhancement - Banks Standby Letter of Credit (SBLC) structures Case Study: Beijing Automotive Group v. Greenland Holding Group Similar to U.S. dollar bond structures 13 / L_LIVE_APAC1:3836247v3 14 / L_LIVE_APAC1:3836247v3 Beijing Automotive Group 15 / L_LIVE_APAC1:3836247v3 16 / L_LIVE_APAC1:3836247v3 16
Issuer Maikun Investment Co., Ltd. (100% indirect subsidiary of Beijing Automotive Group Co., Ltd) BAIC International (Hong Kong) Limited (100% subsidiary of Beijing Automotive Group Co., Ltd) Issue Date 6 June 2014 Tenor 3 years Listing Hong Kong Stock Exchange Issue Amount CNY1.5bn in aggregate Use of proceeds To finance general corporate and working capital Distinctive features Keepwell and liquidity support deed Interest reserve account Equity interest purchase undertaking Guaranteed by an overseas operating subsidiary company 17 / L_LIVE_APAC1:3836247v3 18 / L_LIVE_APAC1:3836247v3 Keepwell and Liquidity Support Basic Structure Keepwell Provider (Beijing SASAC owned mothership company) (Overseas) Issuer Keepwell deed and liquidity support from the Keepwell Provider Five main covenants Ownership of the and the Issuer Maintenance of consolidated net worth and liquidity Relevant indebtedness Irrevocable crossborder standby facility and liquidity support Other undertakings Keepwell and Liquidity Support Ownership of the and the Issuer To maintain the guarantor as the primary overseas subsidiary To directly or indirectly own and hold all shares of the Issuer and ; not to pledge or create a security over such shares To procured the to hold the Issuer s shares 19 / B_LIVE_APAC1:450007v5 20 / B_LIVE_APAC1:450007v5
Keepwell and Liquidity Support Maintenance of consolidated net worth and liquidity To keep a certain nominal consolidated net worth of the Issuer and the For the Issuer and the to keep sufficient liquidity to ensure timely payment For the to keep a certain minimum total equity amount at all times When the Issuer or the does not have sufficient liquidity to meet its obligations, the Keepwell Provider will make the shortfall available Keepwell and Liquidity Support Relevant indebtedness The Keepwell Provider not to create any Relevant Indebtedness (defined broadly as tradable notes outside PRC) The Keepwell Provider not to create any guarantee or indemnity in respect of any Relevant Indebtedness The Keepwell provider or any subsidiary not to provide any security to secure any Relevant Indebtedness There are of course typical exceptions to these limitations. A similar negative pledge is included in the terms and conditions as well 21 / B_LIVE_APAC1:450007v5 22 / B_LIVE_APAC1:450007v5 Keepwell and Liquidity Support Irrevocable crossborder standby facility and liquidity support Triggering Event The financial covenant total equity falls below its ratio ( Financial Ratio Failure ) The Issuer or the fails to provide a liquidity notice ( Liquidity Notice Failure Event ) An event of default under terms and conditions The Issuer or the has a shortfall event ( Shortfall Event ) When there is a Triggering Event, The Keepwell Provider to grant a standby facility and procure remittance of the remittance amount Subject to having obtained regulatory approvals Keepwell and Liquidity Support Other undertakings The corporate documents of the and the Issuer not to be amended to cause material adverse effect on the business and ability to pay For the and the Issuer to comply with the issue documents and the laws of their incorporations For the Issuer not to carry any other business activities Final caveats The keepwell and liquidity support is not a guarantee The Keepwell Provider s performance may be subject to regulatory approvals and it will undertake all reasonable endeavours 23 / B_LIVE_APAC1:450007v5 24 / B_LIVE_APAC1:450007v5
Interest Reserve Account One Interest Period interest payment ( Relevant Balance ) should be kept in the interest reserve account in advance Interest Reserve Account Agreement is to be entered into Main mechanics Issue Date the Issuer to deposit an amount equal to Relevant Balance for the 1st interest period into the account At all times the issuer to maintain a credit balance equal to Relevant Balance for the coming interest payment. 25 / B_LIVE_APAC1:450007v5 Equity Interest Purchase Undertaking Trigger events an event of default under the terms and condition The trustee to provide a purchase notice to the Keepwell Provider The Keepwell Provider by itself or through its subsidiary To purchase equity interest held by the issuer, the and/or any other non-prc subsidiary This obligation can be suspended by if all payment obligations of the Issuer and the have been satisfied and the relevant event of default(s) has been waived Purchase price subject to such purchase should be, among others, no less than the aggregate of - The amount to pay obligations; An amount equal to the Relevant Balance; and Costs, expenses, etc. related to the purchase 26 / B_LIVE_APAC1:450007v5 Comparison of Notable Similar Structures Beijing Automotive Negative Pledge Yes Yes Founder Information Greenland Holding Group Keepwell See previous slides - 75% of the guarantor - 35% of another subsidiary Liquidity support See previous slides - Liquidity Notice Failure Event - an event of default EIPU See previous slides Reasonable endeavours IRA Yes Yes - Through itself or a PRCincorporated subsidiary - Best efforts 27 / B_LIVE_APAC1:450007v5 28 / L_LIVE_APAC1:3836247v3
Case Study Greenland Holding Group Greenland Global Investment Ltd. US$400 million 4.375% Guaranteed Notes due 2019 and US$600 million 5.875% Guaranteed Notes due 2024 Case Study Greenland Holding Group Greenland Global Investment Ltd. US$400 million 4.375% Guaranteed Notes due 2019 and US$600 million 5.875% Guaranteed Notes due 2024 Issuer Greenland Global Investment Ltd. (100% subsidiary of Greenland Holding Group Co., Ltd) Greenland Holding Group Co., Ltd (a Chinese real estate company) Issue Date 3 July 2014 Tenor 5 years & 10 years respectively Listing Hong Kong Stock Exchange Ratings Bond rating: Baa3 rating: Baa3 Greenland Hong Kong (Keepwell and EIPU): Ba1 29 / L_LIVE_APAC1:3836247v3 30 / L_LIVE_APAC1:3836247v3 Case Study Greenland Holding Group Greenland Global Investment Ltd. US$400 million 4.375% Guaranteed Notes due 2019 and US$600 million 5.875% Guaranteed Notes due 2024 Issue Amount US$400 million and US$600 million in aggregate amount Use of proceeds Investments in offshore projects Outlooks for Keepwell Deeds, SBLCs and Guarantee Distinctive features One of the 1 st batch of guaranteed bond deals issued under the new SAFE rules A deed of guarantee entered into with the trustee to be registered with SAFE under the new SAFE rules Limitation of the new SAFE rule: the usage of proceeds must be used for offshore purposes and cannot be repatriated back onshore 31 / L_LIVE_APAC1:3836247v3 32 / L_LIVE_APAC1:3836247v3
Outlooks Keepwell and SBLC structures are expected to keep using Recent PRC Regulations Direct guarantee structures under the new SAFE rules may have big hurdles to overcome It is because the repatriation of the proceeds from the bond issuances into is restricted 33 / L_LIVE_APAC1:3836247v3 34 / L_LIVE_APAC1:3836247v3 Who Can Issue RMB (Dim Sum) Bonds? 2007 PBOC issued Circular 12 which permitted PRC financial institutions to issue RMB bonds in Hong Kong 2008 - The State Council issued rules allowing Hong Kong registered companies to issue RMB bonds in Hong Kong 2009 - First RMB-denominated sovereign bond was issued outside of Mainland A PRC supporting Dim Sum Bonds Issuing?- Structure 1 Issuer Bond Issue 2012 NDRC issued Circular 1162 which permits PRC non-financial institutions to issue RMB bonds in Hong Kong Bond Holder 35 / L_LIVE_APAC1:3836247v3 36 / L_LIVE_APAC1:3836247v3
Simmons & Simmons LLP 2014. 2013. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities. Simmons & Simmons LLP 2014. 2013. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities. A PRC Supporting Dim Sum Bonds Issuing?- Structure 2 New SAFE Rules The Regulations - released on 12 May 2014 effective from 1 June of 2014: Guarantee Provisions on the Administration of Foreign Exchange for Cross-border Guarantee* Issuer Bond Issue Bond Holder Implementation Guidelines on the Administration of Foreign Exchange for Cross-border Guarantee* *Rules cover both guarantee and security. Chinese 保 can refer to both guarantee and security. 37 / L_LIVE_APAC1:3836247v3 38 / L_LIVE_APAC1:3836247v3 New SAFE Rules (cont.) New SAFE Rules (cont.) Guarantee for Debt (NeiBaoWaiDai 内保外贷 ) Three Major Types of Cross-border Debt Structure: For a pure offshore obligation: both Debtor and Creditor are offshore Debtor Creditor Guarantee for Debt (NeiBaoWaiDai 内保外贷 ) Guarantee for Debt (WaiBaoNeiDai 外保内贷 ) Others 39 / L_LIVE_APAC1:3836247v3 40 / L_LIVE_APAC1:3836247v3
New SAFE Rules (cont.) Guarantee for Debt (WaiBaoNeiDai 外保内贷 ) New SAFE Rules (cont.) For a pure onshore obligation- both Debtor and Creditor are onshore Structure: Debtor Creditor Others- 1) s Structure: 2)Debtor and Creditor are on opposite sides of the border Creditor Debtor offshore Structure: Debtor Creditor offshore 41 / L_LIVE_APAC1:3836247v3 42 / L_LIVE_APAC1:3836247v3 New SAFE Rules (cont.) Others- 1) s; 2) Creditor and Debtor are on opposite sides of the border Structure: Structure: Creditor Debtor A PRC supporting Dim Sum Bonds issuing? Structure 1 NeiBaiWaiDai Issuer Bond Issue Debtor Creditor Bond Holder 43 / L_LIVE_APAC1:3836247v3 44 / L_LIVE_APAC1:3836247v3
A PRC supporting Dim Sum Bonds issuing? Structure 1 NeiBaiWaiDai Structure 1- NeiBaoWaiDai Restrictions on Use of Proceeds Entity as an Issuer Bank as The onshore bank will have to report to SAFE through the system connected to SAFE. Enterprise and Non Bank Financial Institution as (onshore individual) The offshore issuer must be an offshore entity set up by the and whose shares are directly or indirectly owned by the The must register with SAFE within 15 working days after entering into the Guarantee. Once the Guarantee is called, and the has paid, the should also register with the SAFE such foreign credit within 15 working days after such enforcement. No repatriation to onshore by way of lending, equity investment or securities investment (directly or indirectly); Not used to acquire shares in an offshore company whose more than 50% assets are onshore; No repayment of loans proceeds of which were repatriated for onshore use by way of lending or equity or securities investment (directly or indirectly); No use for prepayment to onshore under trading or service, if prepayment over a year and the amount exceeds USD1million and 30% of the purchase price. 45 / L_LIVE_APAC1:3836247v3 46 / L_LIVE_APAC1:3836247v3 A PRC Supporting Dim Sum Bonds Issuing? Structure 2 Others A PRC Supporting Dim Sum Bonds Issuing? Structure 2 - Others Bank + Enterprises+ Non Bank Financial Institution Guarantee issuer No registration or filing with SAFE for the Guarantee. issuer remains subject to foreign debt control procedure. Issuer Bond Holder may directly apply to its bank for remittance of funds on enforcement of the Guarantee. Bond Issue 47 / L_LIVE_APAC1:3836247v3 48 / L_LIVE_APAC1:3836247v3
Use of Proceeds Repatriation Current Account vs. Capital Account Use of Proceeds Repatriation Capital Account ( Debt vs. Equity) Current Account Includes: - Imports and exports of goods and services - Dividends remitted by foreign investment enterprises ( FIE ) to investors outside the PRC Capital Account Includes: - Cross-border transfer of capital - Direct investments (such as capital injections) - Securities investments - Loans Shareholder Loan PRC Approvals - Not required if within the borrowing gap Return and Repayment - Easier for the borrower to make principal and interest payments Equity Injection - Required on a case-by-case basis - Dividend will depend on profitability of company - It is not easy to withdraw equity 49 / L_LIVE_APAC1:3836247v3 50 / L_LIVE_APAC1:3836247v3 Use of Proceeds Repatriation Capital Account (Debt) Use of Proceeds Repatriation Capital Account (Equity)- RMB Foreign Direct Investment PBOC Measures No. 23 and PBOC Circular No. 165 RMB loans may be received by an FIE (except for foreign funded real estate enterprises) from its foreign shareholders, affiliated enterprises in the group and foreign financial institutions Subject to foreign debt control and within a borrowing gap being the balance between its approved registered capital and total investment SAFE registration within 15 days of the conclusion of the relevant loan contract (SAFE Circular [2011] 38) MOFCOM Circular 87 Foreign investors may use legally obtained offshore RMB funds for direct investment in. It is not allowed for foreign enterprises to use offshore RMB to invest in securities, financial derivatives (excluding the strategic investment in listed companies) or entrusted loans in. Commerce departments will indicate the word "overseas RMB investment", amount of RMB investment in the application of offshore RMB direct investment Application for changing of contribution currency to RMB: (1) No need for examination and approval; (2) Registration, Account Opening, Funds Transferring, etc. 51 / L_LIVE_APAC1:3836247v3 52 / L_LIVE_APAC1:3836247v3
Use of proceeds refinancing RMB foreign debt can be used to repay existing onshore/offshore debt Foreign Currency foreign debt can be used to repay existing onshore/offshore debt*. Thank You Q&A *Note: previous legislation prohibiting borrowing FX foreign debt to repay existing onshore debt, this has been changed. According to our consultation with one local SAFE, it is currently possible. simmons-simmons.com elexica.com 53 / L_LIVE_APAC1:3836247v3 54 / L_LIVE_APAC1:3836247v3 Key Contacts Jay Lee Partner, Hong Kong T +852 2583 8282 E jay.lee@simmons-simmons.com Jay is experienced in advising banks and corporations on a wide variety of debt capital markets transactions (RMB bonds, G-3 bonds, equity-linked products, high yield bonds, and loan syndications). Jay also advises on structured debt products and derivatives transactions as well as mergers and acquisitions, asset management and other general corporate and finance matters. Jay is qualified in both New York, U.S.A. and Hong Kong. Yongmei Cai Partner, Beijing T +86 10 8588 4502 E yongmei.cai@simmons-simmons.com Yongmei specialises in debt capital markets, banking, cross-border financing, financial products and derivatives, financial regulatory services work. She is uniquely both qualified and practiced extensively in England and the PRC, the experiences of which have given her cutting edge advantage with unique insight and deep knowledge and experiences in advising related cross-border work. She has more than 18 years experience in Beijing, Shanghai and London of advising major international and local financial institutions, commercial corporations and equity investors. 55 / L_LIVE_APAC1:3836247v3