CHINA Law and Practice Contributed by: Nelson Zhou, Yifeng Yuan, Jianwei Yang and Jingbo Zhou, JunHe LLP
1. Market 1.1 Major Lender-Side Players
ing favourable interest rates, financial covenants and large loan sizes, as the targets generally have strong cash profiles and are considered attractive assets. Loan documentation often adheres to standards set by the Loan Market Association (LMA) or Asia-Pacific Loan Market Association (APLMA), and is widely accepted by Chinese commercial banks. Buyers and sellers in the LBO market remain cau- tious due to the uncertainty surrounding poten- tial geopolitical policies, including those expect- ed to be implemented by the newly elected US government, which could impact cross-border investments and acquisition transactions. Deals were delayed due to various factors, including high USD interest rates, regulatory scrutiny over PRC lenders providing RMB loans to offshore borrowers, geopolitical risks and multiple mac- roeconomic uncertainties. The declining equity valuations and fewer new IPOs in the region’s capital markets have made it challenging for PE sponsors to exit their portfolios. Many PE spon- sors in this region are seeking refinancing for their existing leveraged deals or recapitalisation financing for their portfolios to meet the distribu- tion to paid-in criteria required by their limited partners (LPs). While lenders are familiar with traditional refi- nancing, they find recapitalisation financing challenging for the following two main reasons. • The China Banking and Insurance Regulatory Commission (CBIRC) has issued guidelines that impose strict limitations on the purposes of loans. For instance, PRC banks were not authorised to fund equity acquisitions through bank loans until the Acquisition Loans Guide- lines were officially issued in 2008 (and later revised in 2015). Therefore, loans for purpos- es not explicitly permitted by CBIRC rules,
Over the past five years, local Chinese banks have become increasingly active in leveraged buyout (LBO) financings, especially those backed by international private equity (PE) firms. These banks offer terms (including loan tenure, pricing, financial ratios and loan size) that are more favourable than those offered by interna- tional banks. This trend is particularly noticeable in leveraged financing deals aimed at privatising Chinese companies listed in the US. International banks remain the preferred finan- ciers for multinational companies operating in China. Mezzanine debt funds have also been active in the high-yield lending market, targeting Chinese real estate developers affected by a significant liquidity shortage in the real estate capital mar- ket. These funds, primarily from insurance com- panies, provide mezzanine financing to PE spon- sors aiming to sustain their senior financing and maintain their loan-to-cost (LTC) ratios when the valuation of their portfolio companies decreases significantly. These aspects will be discussed in greater detail in subsequent sections. 1.2 Corporates and LBOs The most common LBO transactions involve PE sponsors and international companies selling their China portfolio companies to international strategic buyers, domestic state-owned enter- prises (SOEs) or insurance companies. PRC insurance companies and SOEs are the main buyers in these transactions, and typically do not pursue IPOs or trade sales as exit strate- gies; instead, they prefer targets that offer sta- ble cash yields. Chinese banks have provided robust financing support to these deals, offer-
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