CHINA Law and Practice Contributed by: Nelson Zhou, Yifeng Yuan, Jianwei Yang and Jingbo Zhou, JunHe LLP
opened with the lender (not a security, given the financial assistance restriction). Such escrow arrangement will be replaced by a cash pledge or account charge arrangement after closing the contemplated merge. The cash bridge loan will remain if the target’s PRC operating subsidiaries do not want to pay dividends from the charged cash to the offshore borrower due to the poten- tial tax leakage, but will otherwise be paid off if they want to distribute dividends to an offshore borrower. 3.4 Bonds/High-Yield Bonds PRC companies may adopt two different types of issuer structures to issue bonds/high-yield bonds in the offshore capital market: • offshore issuer; and • onshore/domestic issuer. Offshore Issuer The founders of a PRC company may establish a Cayman entity as an offshore holding company and bond issuer, which will, in turn, own a series of PRC operating entities via one or more Brit- ish Virgin Islands and/or Hong Kong intermedi- ary holding companies. Bonds issued by such issuer may utilise the following credit enhance- ment routes. • A pure credit bond: investors may be entirely comfortable with the credit profile of the issu- er and its onshore subsidiaries and require no other credit enforcement. • A Listco guarantee: some Hong Kong Listcos may carve out some PRC assets and place them under a standalone Cayman issuer, which will issue bonds/high-yield bonds. The Listco will still guarantee these bonds to enhance its credit profile. • Upstreaming security: to improve the bond- holder’s structured subordination position,
PRC operating entities may provide asset collateral (a real property mortgage, an equity pledge, etc) to secure the offshore bonds. This is regarded as an outward security securing offshore debt under PRC law, which must be registered with SAFE. Such regis- tration is a merit review and will not survive SAFE scrutiny unless the offshore bond issuer (on a standalone basis) can prove that it has stabilised cash flow to service offshore debts, and that the likelihood of the upstreaming security being enforced is low. Failure to complete the registration will not render the guarantee/security documents invalid, but outbound remittance of the enforcement proceeds or performance payments could be delayed or blocked, as the account banks processing such remittance are under a regu- latory obligation to verify the SAFE registra- tion certificates. • Keepwell: considering the challenges from the guarantee or upstreaming security structure, Keepwell undertakings from the onshore par- ent of the issuer are also commonly adopted. Typically, the parent acting as the Keepwell provider will undertake to investors that it will disburse funds offshore from the PRC to provide certain financial or liquidity support to the offshore issuer. The parties will acknowl- edge that the Keepwell arrangement is not a guarantee. Onshore/Domestic Issuer PRC companies may issue bonds/high-yield bonds directly into the offshore capital mar- ket. Typical credit enhancement measures may include: • a standby letter of credit issued by a com- mercial bank, which is counter-guaranteed by the parent group; and
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